Alpha
1. coefficient measuring the portion of an investment’s return arising from specific (nonmarket) risk. In other words, alpha is a mathematical estimate of the amount of return expected from an investment’s inherent values, such as the rate of growth in earnings per share. It is distinct from the amount of return caused by volatility, which is measured by the beta coefficient. For example, an alpha of 1.25 indicates that a stock is projected to rise 25% in price in a year when the return on the market and the stock’s beta are both zero. An investment whose price is low relative to its alpha is undervalued and considered a good selection.
In the case of a mutual fund, or other portfolio, alpha measures the relationship between the portfolio’s performance and its beta over a three-year period, and can be viewed as a measure of the value added by the manager.
2. on the London Stock Exchange, alpha stocks were the largest and most actively traded companies in a classification system that was adopted after the big bang in October 1986 and was replaced in January 1991 with the normal market size (NMS) classification system.
| Allowance, Allotment | |
| Alphabet Stock, Alt-A Loan |
Top
1. A measure of performance on a risk-adjusted basis. Alpha takes the volatility (price risk) of a mutual fund and compares its risk-adjusted performance to a benchmark index. The excess return of the fund relative to the return of the benchmark index is a fund's alpha.
2. The abnormal rate of return on a security or portfolio in excess of what would be predicted by an equilibrium model like the capital asset pricing model (CAPM).
Investopedia Says:
1. Alpha is one of five technical risk ratios; the others are beta, standard deviation, R-squared, and the Sharpe ratio. These are all statistical measurements used in modern portfolio theory (MPT). All of these indicators are intended to help investors determine the risk-reward profile of a mutual fund. Simply stated, alpha is often considered to represent the value that a portfolio manager adds to or subtracts from a fund's return.
A positive alpha of 1.0 means the fund has outperformed its benchmark index by 1%. Correspondingly, a similar negative alpha would indicate an underperformance of 1%.
2. If a CAPM analysis estimates that a portfolio should earn 10% based on the risk of the portfolio but the portfolio actually earns 15%, the portfolio's alpha would be 5%. This 5% is the excess return over what was predicted in the CAPM model.
Related Links:
Learn how to generate higher returns while keeping the same risk profile. Adding Alpha Without Adding Risk
Discover these growing funds, which were previously unavailable to the average investor. The Rise Of The Hedged Mutual Fund
Increase your returns by creating the right balance of both these risk measures. Bettering Your Portfolio With Alpha And Beta
This strategy is not as complex as some investment gurus would like you to believe. Pursuing Alpha In A Well-Diversified IRA
How do you choose a fund with an optimal risk-reward combination? We teach you about standard deviation, beta and more! Understanding Volatility Measurements
Not all investors are the same. By the same token, not all investment types are suited for each individual investor. Should You Buy Stock Or An ETF?
These statistical measurements highlight how to mitigate risk and increase rewards. 5 Ways To Measure Mutual Fund Risk
These key stats will reveal whether your advisor is a league leader or a benchwarmer. Does Your Investment Manager Measure Up?
Learn about the basics - and the pitfalls - of investing in mutual funds. Mutual Fund Basics Tutorial
Post a question - any question - to the WikiAnswers community:
Copyrights:
Barron's Finance & Investment Dictionary
Dictionary of Finance and Investment Terms. Copyright © 2010 by Barron's Educational Series, Inc. All rights reserved.
Read more
