Alpha Beta & R-squared Indicators

//Ver.1.00, 2/10/02
//coded by Anthony Faragasso
//e-mail: [email protected]

//Insert your Stock_index,Composite_index,etc.
//as the **Base Market**.

MaxGraph=5;

/***Base Market************/
Mkt="infy";//Must be enclosed in "....."Quotations.
P=Foreign("tcs","C",1);
/**************************/

Periods=21;//Set the period of Observation 

//****Beta***********************/ 

Beta=(( Periods * Sum(ROC( C,1) * ROC(P,1),Periods )) - (Sum(ROC(C,1),Periods)
* Sum(ROC( P,1),Periods))) / ((Periods * Sum((ROC(P,1)^2 ),Periods)) -
(Sum(ROC(P,1 ),Periods)^2 ));
/******************************************/

//*****Alpha*********************/ 

Alpha=(Sum(ROC( C,1) ,Periods) - ( Beta ) * Sum( ROC( P,1) ,Periods ) ) /
Periods;
/******************************************/

/***R-Squared*****************/
R2=Correlation(P,C,Periods)^2;
/************************************/
Graph0=Beta;
Graph0Style=1;
Graph1=Alpha;
Graph1=(LastValue(Highest(Graph0))/LastValue(Highest(Graph1))) * Graph1;
Graph1Style=1;

/**R_squared graphing*****/
//Graph2=r2;
//Graph2Style=1;
//Graph2Color=2;
/*************************/
Title=Name()+" "+"ALPHA "+"("+WriteVal(Alpha,format=1.2)+")"+" "+" BETA
"+"("+WriteVal(Beta,format=1.2)+")"+" "+" R_SQUARED
"+"("+WriteVal(r2,format=1.2)+")";

/**Notes***/
//You've got to start with r-squared, which is an
//indicator of the validity of the beta AND alpha
//measures. Because the r-squared measures just how 
//closely the Stock OR fund tracks the
//index with which it is being compared.

//An r-squared of 1.0 indicates
//A perfect match. AND, in that case, you can
//trust that the beta AND alpha measures are
//valid, too. But, the lower the r-squared, the less
//reliable beta AND alpha measures are. 

//"[Betas and alphas on] a Stock or fund with an r-squared that's below //0.50

//Assuming the r-squared is, say, 0.75 OR higher, you can move on to the
//beta. 
///Alpha Beta & R-squared Indicators

quote = ParamStr( "Quote", "COMPOSITE" );

P=Foreign(quote,"C",1);

Periods=Param("Periods", 30, 2, 100 );

//-------------- Beta Formula ---------------/

Beta=(( Periods * Sum(ROC( C,1) * ROC(P,1),Periods )) - (Sum(ROC(C,1),Periods) * Sum(ROC( P,1),Periods))) / ((Periods * Sum((ROC(P,1)^2 ),Periods)) - (Sum(ROC(P,1 ),Periods)^2 ));

//-------------- Alpha Formula ---------------/

Alpha=(Sum(ROC( C,1) ,Periods) - ( Beta ) * Sum( ROC( P,1) ,Periods ) ) / Periods;

//------------- R-Square Formula -------------/

R2=Correlation(P,C,Periods)^2;

//--------------------------------------------/



_SECTION_BEGIN("Alpha");

Plot( Alpha, _DEFAULT_NAME(), colorGreen,styleLine| styleThick );

_SECTION_END(); _SECTION_BEGIN("Beta");

Plot( Beta, _DEFAULT_NAME(), colorRed,styleLine| styleThick );

_SECTION_END(); _SECTION_BEGIN("R-Squared");

Plot( R2, _DEFAULT_NAME(), colorBlue,styleLine| styleThick );

_SECTION_END();
//------------- Exploration -------------/

Filter = 1; /* all symbols and quotes accepted */

AddColumn( Beta, "Beta", 1.3, IIf(Beta>=1.5,colorRed,IIf(Beta<1,colorBlack,colorBlue ) ));
AddColumn( Alpha, "Alpha", 1.3, IIf(Alpha>0,colorBlue,colorRed ) );
AddColumn( R2, "R-Squared", 1.3,IIf(R2>=0.85,colorBlue,IIf(R2<=0.7,colorRed,colorBlack ) ),IIf(R2>=0.85,colorPaleGreen,colorWhite ));

//--------------------------------------------/