Stocks with a positive alpha are considered
to be underpriced, while those with a negative alpha
are thought to be overpriced. If you are analyzing
the alpha of a stock, you are most likely concerned
a) Risk-adjusted return
b) Sharpe ratio
c) Price-to-earnings ratio
d) Internal rate of return
The correct answer is a):
The risk-adjusted return attempts to measure the risks
taken to achieve a desired return. Alpha refers to
the excess return over the expected return for the
level of risk implied by the security’s beta.
Risk-adjusted return is usually measured by assigning
the security an alpha rating. The sharpe ratio uses
standard deviation as a performance measure.