Alpha

Key Highlights

• Alpha measures the difference between the expected return on a portfolio, based on its level of risk as measured by beta, and the actual return the investor has achieved.

• A positive alpha value indicates that a portfolio has outperformed its benchmark index; conversely, a negative alpha reflects underperformance relative to the benchmark.

What is Alpha?

Alpha in stocks is a measure used by investors to assess the performance of their portfolios relative to the market. Alpha measures the difference between the expected return on a portfolio, based on its level of risk as measured by beta, and the actual return the investor has achieved.

What does Positive and Negative Alpha Mean?

A positive alpha value indicates that a portfolio has outperformed its benchmark index; conversely, a negative alpha reflects underperformance relative to the benchmark.

Importance of Alpha

• Alpha is one of the most important tools used by investors when constructing and managing portfolios.

• High levels of alpha can be indicative of active managing skills, while low alpha values suggest that passive management techniques are being employed.

• Alpha also helps investors judge how much risk they will have to take in order to achieve certain returns.

• As such, it is an extremely useful tool for determining which investments to make and when.