Alpha, beta and R² of your DEGIRO portfolio: are you really beating the market?

Beta (the regression slope against a benchmark) measures how sensitive your portfolio is to market moves, alpha is the return left over once that market sensitivity is accounted for, and R² shows how much of your return is actually explained by that benchmark — together they reveal whether outperformance is skill or just extra market risk.

Beating the market alone says nothing about skill

A portfolio that beats the S&P 500 by 5% a year sounds impressive. But if that portfolio is simply one-and-a-half times as sensitive to market moves as the index, part of that outperformance is just extra risk — not skill. To tell the difference, you look at three regression measures: beta, alpha and R². If you first want to know whether you’re even beating an index on its own terms, read how to fairly benchmark your portfolio against the S&P 500 or MSCI World — here we go a step further than just “who wins”: is that win skill, or just extra risk? And if you deposit along the way, first make sure you calculate your DEGIRO return correctly, with MWRR.

Beta via regression: sensitivity to a benchmark of your choice

Beta is calculated by regressing your daily return against the daily return of a benchmark of your choice — it doesn’t have to be the S&P 500, it could just as well be the MSCI World, Stoxx 600, or another index that fits your portfolio better. The result is the slope of that regression line: a beta of 1.3 means your portfolio moves, on average, 1.3 times as much as that specific benchmark.

A regression on too little data doesn’t tell you much. Rule of thumb: with less than about six months of daily returns, the regression line is still too unstable to mean anything — count on at least a year of data before you take beta and alpha seriously.

Alpha: what’s left after correcting for beta?

Alpha is the return left over once your beta has already been accounted for — the part of your performance that isn’t explained by simply taking on more or less market risk. A positive alpha means that, adjusted for your market sensitivity, you performed better than the regression would predict. A negative alpha means the opposite, even if your absolute return looked fine.

Worked example: your portfolio returned 12% this year, against an S&P 500 that returned 8%. Your calculated beta against the S&P 500 is 1.3.

Expected return based on beta: 1.3 × 8% = 10.4%

Alpha: 12% − 10.4% = 1.6%

That 1.6% is what’s left after correcting for your market sensitivity — possibly skill, possibly luck, but in any case not just extra beta risk.

R²: how reliable is that beta, really?

R² shows what percentage of your portfolio’s movements is actually explained by the chosen benchmark. At an R² of 0.85, 85% of your return variation is explained by the benchmark — beta and alpha are meaningful. At a low R² (say, 0.20), your portfolio moves largely independently of that benchmark, and beta and alpha say much less about how you’re really performing.

We regularly see portfolios with an R² of 0.2-0.3 against the S&P 500 — there, a “positive alpha” is essentially noise, not signal. Rule of thumb: only trust alpha and beta once R² is above 0.5; below that, the regression simply doesn’t say enough about your portfolio. No R², no conclusion.

Performance attribution: where did the return come from?

Beyond the regression itself, performance attribution helps show which part of your total return is attributable to market movement (via your beta) and which part to alpha — so you know whether your result was mostly market risk, or genuinely different choices. To see which individual holdings drove your result, look at return contribution per position. For a fuller risk picture, you can combine this with maximum drawdown and the Sortino ratio and with how your wealth is spread across positions and sectors.

How ClearAnalyser calculates this for you

ClearAnalyser calculates your portfolio’s beta, alpha and R² live via regression of your daily return against a benchmark of your choice, visualises this in a return regression chart, and breaks your performance down into an attribution between market movement and alpha. Which other tools show alpha and beta is listed in the DEGIRO portfolio tracker comparison.

Sources: Beta — Investopedia · R-Squared — Investopedia