What Is Alpha?
Alpha is a term used into indicate risk-adjusted performance. It is one of the 5 technical risk ratios (beta, standard deviation, Sharpe ratio, R-squared, ).
Alpha is calculated by comparing the volatility of a fund or security to the risk-adjusted performance of a benchmark index. The alpha of the fund or security is the excess return compared to that of the index.
For example, an alpha of +1.5 would mean that the fund or security has outperformed the benchmark index by 1.5%.
When investing in a fund or asset, alpha is one of the most desirable attributes. Fundamental investors ideally want a market neutral portfolio (0 beta) with a high alpha. Investors must be careful that the returns they receive are not simply a byproduct of a portfolio with a high beta in a bull market, as this will cause them great losses during a bear market.
- Standard Deviation
- Sharpe Ratio
- Technical Analysis