What Is Alpha? Meaning & Example
Definition
Alpha is the return an investment earns above or below what would be expected given its risk relative to a benchmark. Positive alpha suggests outperformance after adjusting for risk.
Related terms
Beta measures how much an investment tends to move relative to the overall market. A beta above 1 means it usually swings more than the market, below 1 means less.
BenchmarkA benchmark is a standard, often a market index, used to measure an investment's performance. Comparing with a suitable benchmark shows whether a strategy added value.
Sharpe RatioThe Sharpe ratio measures return earned per unit of risk, using excess return over a risk-free rate divided by volatility. Higher values mean better risk-adjusted performance.
What is Alpha?
Alpha is the return an investment earns above or below what would be expected given its risk relative to a benchmark. Positive alpha suggests outperformance after adjusting for risk.
Can you give an example of Alpha?
A fund that returned 9% when similar-risk benchmarks returned 7% would have about 2% alpha.