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Alpha
The return a portfolio earned beyond what its risk level and benchmark explain.
Detailed explanation
Alpha isolates the manager's contribution. Positive alpha means the portfolio did better than its exposure to market risk would predict; negative alpha means it lagged. It is fragile — a few years of alpha can easily be luck rather than skill.
Formula
Alpha = Portfolio return − [ Risk-free rate + Beta × (Benchmark return − Risk-free rate) ]
Example
Portfolio 18%, risk-free 7%, beta 1.1, benchmark 16%: alpha = 18 − [7 + 1.1 × 9] = 1.1%.
Why it matters
It is the honest test of whether an active fund's higher fee bought anything.
Key points
- Always measured against a specific benchmark and period.
- Fees are deducted before investors see any alpha.
- Persistent alpha is rare across long horizons.
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Educational content only. Definitions and examples are illustrative and are not investment, tax or legal advice.