Alpha Reference and explanation


Alpha is the measure of risk-adjusted performances. It is usually carried out by comparing price risk to a certain benchmark. If there is an excess return, it will be called alpha. In simple and non-technical terms, alpha is excess return compared with the market.

Alpha is also used for indicating abnormal return on a certain portfolio. The rate of return would be considered abnormal when it is contradicting to prediction made using an equilibrium model.

Alpha is a part of the five technical risk ratios which are used as statistical measurements for modern portfolio theory. Investors use these indicators to determine risk and reward. R-squared, deviation, beta, and Sharpe ratio are other four indicators.

Alpha can be positive or negative. A positive alpha indicates that the fund has outperformed its benchmark whereas a negative alpha indicates underperformance. The alpha is a ratio but it can be represented in percentage. 

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