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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 ?
Indeed, for the emitted alpha particles there are two energy ranges: with the upper limit of 2-4 MeV for rare earth elements and 4-9 MeV for the elements heavier than lead [11].
Effects of alpha particle radiation on gene expression in human pulmonary epithelial cells.
Bystander signals initiated by very low doses of alpha particles in irradiated normal human diploid fibroblasts induced DSB damage in unirradiated cells, and the percentage of DSBs in bystander cells was not dependent on the dose delivered (Hu et al.
They split a lithium nucleus into alpha particles, with an energy release providing the first direct experimental confirmation of Einstein's E=[mc.
It takes a direct hit from just one alpha particle to destroy a lone cancer cell.
When U-238 spontaneously undergoes radioactive decay, it emits alpha particles and turns into Thorium-234.
Along with the neutrons, alpha particles are released at exactly 180 degrees opposite to the neutrons.
Since alpha particles only travel short distances of between 2 and 5 cell diameters, there is less chance of damaging healthy tissue with this type of therapy.
Some of the radon daughters decay by the emission of high energy alpha particles which can kill as many as two cells in their path; the damage which may be only increased in conjunction with other possible environmental factors such as viruses.
One gram of DU emits more than 12,000 cell-damaging alpha particles per second.
This is the least energetic form of radioactive emission; alpha particles typically only travel a few centimetres, and are easily stopped.
Radon's radioactivity consists of alpha particles, which are generally unable to pass through the stomach's lining but may lodge in the lungs.