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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.


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.


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 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 periodicals archive ?
0 MeV, which corresponds well to the actual alpha particles binding energy (28.
Alpha particles are known to cause chromosomal damage to the tissue that lines the lungs.
this is done by special filters for absorbing radon inside the counter machine and the alpha particles emitted from it are counted by ionization chamber in counter machine.
Designed and built by Canadian scientist Rail Gellert, the APXS uses radioactive curium-244 to produce both alpha particles and X-rays that probe the elemental composition of Martian rocks.
210]Po presents a radiation hazard only if taken into the body because its alpha particles have a range of only 40-50 [micro]m in biological tissue and are easily stopped by surface layers of the skin (Jefferson et al.
Rutherford advised probing the atom with the alpha particles expelled by certain radioactive atoms.
The counters from Cooking Hacks will show beta and gamma radiation, and can be fitted with tubes that have a thin mica window at one end to show alpha particles.
Although radioactive alpha particles believed to be from the plant were detected in Tokyo, about 200 km away, there is little possibility -- even in a worse-case scenario -- that human health would be at risk in places more than 30 km from the plant.
TINY missiles containing the same kind of radiation used to kill a former spy are being developed to destroy cancer Scientists have found a way to package deadly alpha particles inside DNA-sized tubes of carbon, it was revealed yesterday.
He explores the interactions with matter and energetic particles, including photons, electrons, protons, alpha particles and neutrons with a variety of applications including photon and neutron cross sections, charged particle stopping powers, electron mean ranges and angular distributions, covering photons as they appear in long wavelengths and other configurations and as an element of photoelectric absorption, electrons, including in elastic scattering from and atom and in the case of collision energy loss, protons and heavier ions, including proton and alpha particle stopping powers in selected materials, and a range of topics on neutron interactions.
Inside the crystal, radioactive decay occurs and tiny atomic fragments called alpha particles shoot away from the decaying nucleus, which recoils like a rifle.