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E146: Did the Fed break the VC model? Plus IPOs, M&A, revaluing unicorns & more
All-In with Chamath, Jason, Sacks & Friedberg
Understanding Investment Returns and Alpha vs. Beta
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Investors should consider the comparison of alternative returns and market returns to evaluate the value of their investment. The difference between the returns of an investment and the returns of the market, represented by the S&P 500, is known as alpha. Alpha signifies the excess return generated by deviating from the market. By comparing the returns of a specific investment (e.g., Instacart) with the returns of the S&P 500, investors can assess the value added or lost. For instance, the comparison revealed that a series C investor in 2015 gained 32% alpha by investing in Instacart instead of the S&P 500. However, this prompts the important consideration of whether the incremental gain over a specific period justifies the deviation from the market.
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