DEFINITION of 'Alpha'
1. A measure of performance on a riskadjusted basis. Alpha takes the volatility (price risk) of a mutual fund and compares its riskadjusted performance to a benchmark index. The excess return of the fund relative to the return of the benchmark index is a fund's alpha.
2. The abnormal rate of return on a security or portfolio in excess of what would be predicted by an equilibrium model like the capital asset pricing model (CAPM).
INVESTOPEDIA EXPLAINS 'Alpha'
1. Alpha is one of five technical risk ratios; the others are beta, standard deviation, Rsquared, and the Sharpe ratio. These are all statistical measurements used in modern portfolio theory (MPT). All of these indicators are intended to help investors determine the riskreward profile of a mutual fund. Simply stated, alpha is often considered to represent the value that a portfolio manager adds to or subtracts from a fund's return.
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%.
2. If a CAPM analysis estimates that a portfolio should earn 10% based on the risk of the portfolio but the portfolio actually earns 15%, the portfolio's alpha would be 5%. This 5% is the excess return over what was predicted in the CAPM model.
Now the definition is laid out, let's go deeper  Read A Deeper Look At Alpha and Adding Alpha Without Adding Risk
VIDEO

Sharpe Ratio
A ratio developed by Nobel laureate William F. Sharpe to measure ... 
Sortino Ratio
A modification of the Sharpe ratio that differentiates harmful ... 
Weighted Alpha
A weighted measure of how much a stock has risen or fallen over ... 
Capital Asset Pricing Model  CAPM
A model that describes the relationship between risk and expected ... 
Greeks
Dimensions of risk involved in taking a position in an option ... 
Beta
A measure of the volatility, or systematic risk, of a security ...

What are the advantages and disadvantages of zerobased budgeting in accounting?
The main controversy over the use of the information ratio is that it is an expost measurement often used to predict the ... Read Full Answer >> 
What metrics should I use to evaluate the risk return tradeoff for a mutual fund?
One of the principles of investing is the riskreturn tradeoff, defined as the correlation between the level of risk and ... Read Full Answer >> 
What are the pros and cons of using the S&P 500 as a benchmark?
The Standard & Poor's 500 Index is the most commonly used benchmark for determining the state of the overall economy. ... Read Full Answer >> 
Why is the Weighted Alpha important for traders and analysts?
The weighted alpha is a technical indicator used by traders and analysts to identify securities that have performed well ... Read Full Answer >> 
What's the relationship between r squared and beta?
Beta and Rsquared are two related, but different measures. A mutual fund with a high Rsquared correlates highly with a ... Read Full Answer >> 
Is alpha the best risk measure?
There are many different types of risk associated with investing, and it is almost impossible for any single technical indicator ... Read Full Answer >>

Fundamental Analysis
Taking Shots At CAPM
Find out why many investors think the capital asset pricing model is full of holes. 
Options & Futures
Getting To Know The "Greeks"
Understanding price influences on options positions requires learning about delta, theta, vega and gamma. 
Options & Futures
Bettering Your Portfolio With Alpha And Beta
Increase your returns by creating the right balance of both these risk measures. 
Options & Futures
The Forex Greeks And Strategies
We look at the different kinds of Greeks and how they can improve your forex trading. 
Options & Futures
Adding Alpha Without Adding Risk
Learn how to generate higher returns in your portfolio while keeping the same risk profile. 
Mutual Funds & ETFs
Understanding Volatility Measurements
How do you choose a fund with an optimal riskreward combination? We teach you about standard deviation, beta and more! 
Options & Futures
Using "The Greeks" To Understand Options
These riskexposure measurements help traders detect how sensitive a specific trade is to price, volatility and time decay. 
Forex Education
Reduce Your Risk With ICAPM
Avoid unnecesary risks involved in CAPM calculations by also incorporating ICAPM into the mix. 
Options & Futures
Options Greeks
Get to know the essential risk measures and profit/loss guideposts in options strategies. 
Investing Basics
Explaining Idiosyncratic Risk
Idiosyncratic risk is the risk inherent in a particular investment due to the unique characteristics of that investment.