What is Alpha in finance?

Alpha is the measurement of an investment portfolio's performance in relation to the wider market. Find out more about alpha in finance and see an example.

What is alpha & beta?

Alpha and beta are two of the key measurements used to evaluate the performance of a stock, a fund, or an investment portfolio. Alpha measures the amount that the investment has returned in comparison to the market index or other broad benchmark that it is compared against. Beta measures the relative volatility of an investment.

How is alpha calculated?

The basic calculation of alpha simply subtracts the total return of an investment from the benchmark returns, over the same period. However, it is common to use the capital assets pricing model, or CAPM for short, to gain a more detailed insight into a portfolio’s performance.

What is a portfolio alpha?

It is one of modern portfolio theory’s (MPT) statistical measures used to quantify the returns made from an investment against that of a benchmark market index. In other words, the excess return of an investment relative to the return of a benchmark index is the investment’s alpha.