In a paper published in 1964, Nobel Prize winner in economics William Sharpe (Sharpe of the Sharpe ratio) split the returns of financial assets into two parts:

The part that moves with the market is called beta return.

The part that does not fluctuate with the market is called alpha return

Corresponds to the formula:

Asset return = alpha return + beta return + residual return (residual return is a random variable with an average value of 0 and can be skipped)

Beta Return Corresponding to the market benchmark, each financial asset will have a beta coefficient to indicate the degree of volatility of this financial asset compared to the market benchmark.

For example, if the beta coefficient is 1, it means that the financial asset fluctuates in line with the market benchmark. If the market benchmark rises by 10%, the financial asset will also rise by 10%. For example, if the beta coefficient is 0.9, it means that the financial asset has less volatility. Compared with the market benchmark, if the market financial rises by 10%, the financial asset will rise by 9%; a beta coefficient of 1.1 means that the volatility is higher than the market benchmark. If the market benchmark rises by 10%, the financial asset will rise by 11%.

Alpha income is income that has nothing to do with market fluctuations. This part of income is the excess income that traders need to obtain through management, timing, target selection and other means.

Generally speaking, when we buy spot stocks, we mainly pursue beta returns, while doing contracts mainly pursue alpha returns.