Alpha


Also found in: Dictionary, Thesaurus, Medical, Legal, Acronyms, Idioms, Encyclopedia, Wikipedia.
Related to Alpha: Alpha male

Alpha

Measure of risk-adjusted performance. Some refer to the alpha as the difference between the investment return and the benchmark return. However, this does not properly adjust for risk. More appropriately, an alpha is generated by regressing the security or mutual fund's excess return on the benchmark (for example S&P 500) excess return. The beta adjusts for the risk (the slope coefficient). The alpha is the intercept. Example: Suppose the mutual fund has a return of 25%, and the short-term interest rate is 5% (excess return is 20%). During the same time the market excess return is 9%. Suppose the beta of the mutual fund is 2.0 (twice as risky as the S&P 500). The expected excess return given the risk is 2 x 9%=18%. The actual excess return is 20%. Hence, the alpha is 2% or 200 basis points. Alpha is also known as the Jensen Index. The alpha depends on the benchmark used. For example, it may be the intercept in a multifactor model that includes risk factors in addition to the S&P 500. Related: Risk-adjusted return.

Alpha

1. The measure of the performance of a portfolio after adjusting for risk. Alpha is calculated by comparing the volatility of the portfolio and comparing it to some benchmark. The alpha is the excess return of the portfolio over the benchmark. It is important to Markowitz portfolio theory and is used as a technical indicator.

2. The excess return that a portfolio makes over and above what the capital asset pricing model estimates.

alpha

The mathematical estimate of the return on a security when the market return as a whole is zero. Alpha is derived from a in the formula Ri = a + bRm which measures the return on a security (Ri) for a given return on the market (Rm) where b is beta. See also capital-asset pricing model, characteristic line.

Alpha.

Alpha measures risk-adjusted return, or the actual return an equity security provides in relation to the return you would expect based on its beta. Beta measures the security's volatility in relation to its benchmark index.

If a security's actual return is higher than its beta, the security has a positive alpha, and if the return is lower it has a negative alpha.

For example, if a stock's beta is 1.5, and its benchmark gained 2%, it would be expected to gain 3% (2% x 1.5 = 0.03, or 3%). If the stock gained 4%, it would have a positive alpha.

Alpha also refers to an analyst's estimate of a stock's potential to gain value based on the rate at which the company's earnings are growing and other fundamental indicators.

For example, if a stock is assigned an alpha of 1.15, the analyst expects a 15% price increase in a year when stock prices are generally flat. One investment strategy is to look for securities with positive alphas, which indicates they may be undervalued.

References in classic literature ?
Windigate, of the Alpha, and by him to his club, of which Mr.
Alpha Kappa Alpha Sorority is the nation's oldest African-American sorority, founded in 1908 on the campus of Howard University.
If alpha didn't have the value it has, Earth as we know it wouldn't exist," he adds.
Effective September 30, 1994, Alpha 1 concluded a license agreement with SciClone Pharmaceuticals, Inc.
TTE has contracted Alpha to design, construct and demonstrate the TTE 540HP Heavy Duty Highway Truck Engine Prototype.
Radon gas, a breakdown product of uranium that seeps naturally from the ground, accounts for most of the alpha particles that bombard people.
Vincent Simmon, the President and Chief Executive Officer of Alpha 1, "We are pleased with the new licensing agreement that has been reached with SciClone and the resolution of the arbitration issues.
This exchange underscores the confidence Alpha Engines has in our ability to successfully manufacture and bring to fruition, a ground-breaking and marketable product based on Alpha's patented technology," reports Mr.
1: allelic association and a unique haplotype associated with alpha 1-antitrypsin deficiency.
Under the terms of the agreement, Alpha 1 will receive royalties of between 6-7% of SciClone's net sales of thymosin alpha 1 in the newly acquired territory, and between 3-3 1/2% of net sales of the drug in SciClone's existing territory.