What Is Alpha?

Patrick Curtis

Reviewed by

Patrick Curtis WSO Editorial Board

Expertise: Investment Banking | Private Equity

Alpha is a term used in trading to indicate risk-adjusted performance. It is one of the 5 technical risk ratios (beta, standard deviation, Sharpe ratio, R-squared, alpha).

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.

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Patrick Curtis

Patrick Curtis is a member of WSO Editorial Board which helps ensure the accuracy of content across top articles on Wall Street Oasis. He has experience in investment banking at Rothschild and private equity at Tailwind Capital along with an MBA from the Wharton School of Business. He is also the founder and current CEO of Wall Street Oasis. This content was originally created by member WallStreetOasis.com and has evolved with the help of our mentors.