The definition of Alpha in investing
- A measure of performance in investing viewed through a risk adjusted basis. The excess risk-adjusted perofrmance to a benchmark index relative to the return of the benchmark index is a fund’s alpha.
- It is one of the technicial risk ratios like beta, standard deviation, R-squared, and the Sharpe ratio which are apart of the Modern Portfolio Theory (MPT).
- Used to determine the risk-reward profile of a fund
- A positive alpha of 1.0 means the fund has outperformed its benchmark index by 1%. Correspondingly, a similar negative alpha would indicate an underperformance of 1%.