What is alpha in finance?
Alpha is the measurement of an investment portfolio’s performance against a certain benchmark –usually a stock market index. In other words, it’s the degree to which a trader has managed to ‘beat’ the market over a period of time. The alpha can be positive or negative, depending on its proximity to the market.
Alpha is not only used as a measure of the portfolio compared to the underlying market, but also of the performance of the fund manager – who implements the strategies and manages trading activity.
Alpha vs beta
Alpha and beta are used in conjunction to compare and analyse portfolio returns. While alpha is the measure of the return of a portfolio, beta is the measure of its past volatility – or risk – when compared to the wider market. For example, if the beta figure is 1.2, it means the stock is 20% more volatile than the market.