5 Things To Know About Alpha
It is the first letter of the Greek alphabet, but also an important tool when measuring fund performance.
Alpha is the difference between a fund's expected returns based on its beta and its actual returns. Alpha is sometimes interpreted as the value that a portfolio manager adds, above and beyond a relevant index's risk/reward profile. If a fund returns more than what you'd expect given its beta, it has a positive alpha. If a fund returns less than its beta predicts, it has a negative alpha.
Which brings us to beta. Beta measures an investment's volatility, or more specifically, its sensitivity to the movements of a market index. On days when a market index generates a positive return, a fund with a high beta would be expected to gain even more than the index. On the flip side, it would also be expected to lose more than the index during market downdrafts.
Here are 5 things to note about alpha.