Glossary
Alpha in Finance
In finance, alpha measures the performance of an investment relative to a market benchmark. It represents the excess return earned above the return expected based on the asset’s risk (often measured by beta). A positive alpha means the investment outperformed the market, while a negative alpha means it underperformed.
How is alpha calculated?
Alpha = Actual Return − Expected Return (based on market return and beta). It isolates how much return comes from skill, not just market movements.
What does a positive alpha mean?
A positive alpha indicates that an investment outperformed its benchmark after adjusting for risk—often viewed as a sign of skillful management.
How is alpha different from beta?
Beta measures market-related risk (volatility), while alpha measures the return generated beyond that risk. Beta is about movement; alpha is about added value.
Why is alpha important for investors?
It helps evaluate whether a fund manager or strategy is truly adding value versus just riding the market’s performance.
Is alpha only used in stock investing?
No. Alpha can apply to any asset class—stocks, bonds, hedge funds, or even real estate—where performance is compared to a relevant benchmark.
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