Define: Alpha

A coefficient which measures risk-adjusted performance, factoring in the risk due to the specific security, rather than the overall market. A high value for alpha implies that the stock or mutual fund has performed better than would have been expected given its beta (volatility).

Alpha, the first Greek alphabet letter, is also the risk-adjusted measurement investment term for “excess return”. For example, an alpha of 1.5 means a fund outperformed the market by 1.5%. Alpha in a stock portfolio is the measure of a manager’s ability to select stocks that outperform the market return, often benchmarked by the S&P500, across a defined time period. Alpha is also applied more generally to rate any active portfolio manager return performance, because alpha means the risk-adjusted portfolio or investment return above any assigned risk benchmark or above the risk-free investment rate applied to calculate the alpha measurement. Alpha, the excess return above the market, plus the “beta” or market return, is then, the total return for the period on the portfolio. “Portable” alpha as often referred to by hedge fund managers, is alpha that can reduce risk or increase a portfolio’s alpha return with non-correlated strategies that contribute to risk adjustment for the entire portfolio. Alpha excess return theory can trace its roots to CAPM and other risk adjustment finance return measurement models that define risk benchmarks.

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Definitions for Alpha are sourced/syndicated and enhanced from:

• A Dictionary of Economics (Oxford Quick Reference)
• BusinessDictionary.com
• Oxford Dictionary Of Accounting
• Oxford Dictionary Of Business & Management

This glossary post was last updated: 4th February 2020.