A number of financial pundits have recently noted the increasing correlation between disparate sectors and asset classes. Correlation measures the extent to which different securities or groups of securities move in concert with one another. This is a key measure when it comes to portfolio construction because correlation can be used to determine an allocation mix that can better weather downturns.

Between 1990 and 2007, correlation among stocks in the S&P 500 ranged between 5 percent and 45 percent, but that reading spiked to a high of 71 percent last year. For the sake of context, a reading of 100 percent shows a perfect correlation, which means all securities move in lockstep.

If the trend toward greater correlation among securities persists, that could raise some uncomfortable questions for mutual fund managers. Investors could start to wonder whether a substantial portion of their return is derived from general market trends rather than the investment acumen of their fund managers. That concern is commonly cited as a key factor in causing actively managed mutual funds to lose market share to cheaper, passively managed index funds over the past several years.

But how do you determine whether an actively managed mutual fund adds values for shareholders and isn’t simply a closet index fund? That’s where measures such as alpha and beta come into play.

Beta is a measure of volatility and, to some extent, correlation. A mutual fund with a beta of 1 would be expected to generate the same return as its bench- mark index, whereas a fund with a beta of 1.1 would be expected to perform 10 percent better in up markets and 10 percent worse in down markets. As a further example, a fund with a beta of 0.9 would be expected to underperform its benchmark by 10 percent during up markets and outperform by 10 percent in down markets.

While an index fund should have a beta as close to 1 as possible, most actively managed funds should deviate from their benchmark. Otherwise, their performance is simply dependent upon riding the index. Generally, investors look for actively managed funds that have a lower beta than their benchmark, while outperforming it on a total-return basis.

Alpha measures a fund’s performance on a risk-adjusted basis relative to its benchmark, and provides confirmation of whether a fund manager is actually adding value to the portfolio with his investment process.

Positive alpha indicates that a fund manager successfully added value to the fund, while negative alpha shows the fund manager is likely detracting from the fund’s performance. For example, if a fund has an alpha of 2.6 that means that it has outperformed its benchmark by 2.6 percent on a risk-adjusted basis.

For mutual fund investors, the sweet spot of fund selection is finding a fund that can generate positive alpha while sporting a lower beta than its benchmark.

Thankfully, fund companies have realized that mutual fund investors have become increasingly savvy about such metrics, so they now publish detailed performance data that include alpha and beta on their websites. Additionally, this information can also typically be found on brokers’ websites, as well as online investment portals such as Google Finance.