Alpha Generator

DEFINITION of 'Alpha Generator'

Any security that, when added to an existing portfolio of assets, generates excess returns or returns higher than a pre-selected benchmark without additional risk. An alpha generator can be any security; this includes government bonds, foreign stocks, or derivative products such as stock options and futures.

BREAKING DOWN 'Alpha Generator'

Keep in mind that alpha itself measures the returns a portfolio produces in excess of the return originally estimated by the capital asset pricing model, on a risk-adjusted basis. Therefore, an alpha generator adds to portfolio returns without adding any additional risk, as measured by volatility or downside volatility. This follows modern portfolio theory in allowing investors to maximize returns while keeping a certain level of risk.

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RELATED FAQS
  1. Stocks with a positive alpha are considered to be underpriced ...

    The correct answer is a): The risk-adjusted return attempts to measure the risks taken to achieve a desired return. Alpha ... Read Answer >>
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    Read about some of the strengths and weaknesses of alpha, a popular risk-adjusted performance indicator based on modern portfolio ... Read Answer >>
  3. Does a negative alpha automatically mean I should sell?

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  4. What is the Weighted Alpha formula and how is it calculated?

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