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
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Sharpe Ratio
A ratio developed by Nobel laureate William F. Sharpe to measure ... 
Sortino Ratio
A modification of the Sharpe ratio that differentiates harmful ... 
RSquared
A statistical measure that represents the percentage of a fund ... 
Mutual Fund
An investment vehicle that is made up of a pool of funds collected ... 
Beta
A measure of the volatility, or systematic risk, of a security ... 
Greeks
Dimensions of risk involved in taking a position in an option ...

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 >> 
What techniques are most useful for hedging exposure to the banking sector?
The banking sector moves in the same direction as the broader market, but its volatility is much lower. The sector's stability ... Read Full Answer >> 
What is the variance/covariance matrix or parametric method in Value at Risk (VaR)?
The parametric method, also known as the variancecovariance method, is a risk management technique for calculating the value ... Read Full Answer >>

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