- alpha < 0: the investment has earned too little for its risk (or, was too risky for the return)
- alpha = 0: the investment has earned a return adequate for the risk taken
- alpha > 0: the investment has a return in excess of the reward for the assumed risk
In true TradingView spirit, the author of this script has published it open-source, so traders can understand and verify it. Cheers to the author! You may use it for free, but reuse of this code in a publication is governed by House Rules. You can favorite it to use it on a chart.
study(title="Alpha", shorttitle="Alpha") ////SHOULD BE USED TOGETHER WITH "Beta" INDICATOR //Alpha is a measure of the active return on an investment, the performance of that investment compared to a suitable market index, where 0.01 = 1% //alpha < 0: the investment has earned too little for its risk (or, was too risky for the return) //alpha = 0: the investment has earned a return adequate for the risk taken //alpha > 0: the investment has a return in excess of the reward for the assumed risk //Beta Calculation sym = "SPX500", res=period, src = close, length = input(title="rolling beta window",defval=300, minval=1) ovr = security(sym, res, src) ret = ((close - close)/close) retb = ((ovr - ovr)/ovr) secd = stdev(ret, length), mktd = stdev(retb, length) Beta = correlation(ret, retb, length) * secd / mktd //Alpha Calculation y = input(title="alpha period", type=integer, defval=90, minval=1, maxval=1000) ret2 = ((close - close[y])/close) retb2 = ((ovr - ovr[y])/ovr) alpha = ret2 - retb2*Beta plot(alpha, color=green, style=area, transp=40)