What is “alpha” in investing?

Alpha refers to an investment’s performance compared to a market benchmark. The term is often used to gauge the skill and strategic decisions of an investment portfolio manager.

Alpha can be negative. If an investment delivers a return below the market average, its alpha will indicate that fund as underperforming on a relative basis. While past performance is not an indication of future results, investors, of course, seek opportunities to buy securities that have experienced positive alphas.

Alpha is usually expressed as a number that refers to a percentage. For example, a mutual fund with an alpha of 2.0 would mean that fund has outperformed the market average by 2%. Investors can use this information to help their analysis, though it’s important to remember that past performance does not guarantee future returns.

Alpha measures the difference between a portfolio’s actual returns and its expected performance, given its level of risk as measured by Beta. Beta is a way of measuring a portfolio’s volatility, or systemic risk, compared with the overall market’s volatility. Portfolios with a value greater than 1 are more volatile than the market. A positive (negative) Alpha indicates the portfolio has performed better (worse) than its Beta would predict.


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