UK Accounting Glossary
Weighted Alpha is a weighted measure of how much a stock has risen or fallen over a certain period on a risk-adjusted basis. The Alpha is weighted by placing more emphasis on recent activity than those assigned to earlier movements. This helps to give a return figure that has a greater focus on the most current period and is a more relevant measure for short-term analysis.
Weighted Alpha is a measure of stock price movements over a given period of time, typically one year. Weighted alpha assigns a higher weight to more recent fluctuations than less recent ones. Because of this difference in weighting, weighted alpha emphasizes the most recent price changes and therefore can be used to gauge short-term trends in stock price movements. Technical analysts often use the weighted alpha to get a clear picture of which stocks have shown strength over the period, specifically the more recent part of the period. Using weighted alpha can help analysts to gauge the positive momentum (i.e. positive weighted alpha) or negative momentum (negative weighted alpha) of a particular stock and may signal for a buy or a sell. It should be noted that some analysts limit how much a daily price may fluctuate within the calculation for Weighted Alpha, thereby setting aside large single-day movements that may represent market overreaction.
Alpha is generated by regressing the investment’s excess return on the benchmark excess return. See Alpha for the detailed calculation. There is no specific formula for weighted Alpha and the calculation is dependent on the technical analyst.
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This glossary post was last updated: 5th February 2020.