Financial Definition of Alpha
Meaning of Alpha
A measure of selection risk (also known as residual risk) of a mutual fund in relation to the market. A positive alpha is the extra return awarded to the investor for taking a risk, instead of accepting the market return. For example, an alpha of 0.4 means the fund outperformed the market-based return estimate by 0.4%. An alpha of -0.6 means a fund’s monthly return was 0.6% less than would have been predicted from the change in the market alone. In a Jensen Index, it is factor to represent the portfolio’s performance that diverges from its beta, representing a measure of the manager’s performance.
Related Entries of Alpha in the Encyclopedia of Law Project
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Alpha in Historical Law
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What is Alpha?
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Alpha and Beta are both used by investors to determine the risk-reward profile of an investment. Alpha is the return on an investment that is in excess of the compensation for the risk borne by making that investment. Alpha is commonly referred to as the value that a portfolio manager adds beyond a fund’s risk/reward profile.
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