What is Alpha?


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 betastandard 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

Example

  • 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%.