Saturday, December 4, 2010

Alpha

Alpha: Alpha is a risk adjusted measure of return. It measures the level of a fund's return relative to a benchmark, and is often used for measuring the fund manager's value-add. In basic terms a positive alpha of 1.0 would mean that the fund return is higher than the index return by 1% after accounting for risk. Alpha can also be derived using the CAPM (Capital Asset Pricing Model), by subtracting the CAPM estimated required return from the actual experienced return. Thus alpha is the return that is independent of the market - in this way it is considered a measure of fund manager skill or stock picking skill.

Synonyms: Abnormal returns, Excess returns, Risk-adjusted returns, Jensen's Alpha, Jensen's measure

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