Alpha
Alpha is a measure of an investment’s performance relative to a benchmark index. It is used to measure the performance of a portfolio manager or investment strategy. Alpha is calculated by subtracting the expected return of a benchmark index from the actual return of the portfolio or investment strategy. A positive alpha indicates that the portfolio or strategy has outperformed the benchmark, while a negative alpha indicates that the portfolio or strategy has underperformed the benchmark.
History of Alpha
The concept of alpha was first introduced by Nobel Prize-winning economist William Sharpe in the 1960s. Sharpe developed the Capital Asset Pricing Model (CAPM), which is used to calculate the expected return of a portfolio based on its risk. Alpha is the difference between the actual return of a portfolio and the expected return of the portfolio based on the CAPM. Alpha is used to measure the performance of a portfolio manager or investment strategy relative to the benchmark.
Comparison Table
| Portfolio/Strategy | Actual Return | Expected Return | Alpha |
|---|---|---|---|
| Portfolio A | 10% | 8% | 2% |
| Portfolio B | 7% | 8% | -1% |
Summary
Alpha is a measure of an investment’s performance relative to a benchmark index. It is calculated by subtracting the expected return of a benchmark index from the actual return of the portfolio or investment strategy. A positive alpha indicates that the portfolio or strategy has outperformed the benchmark, while a negative alpha indicates that the portfolio or strategy has underperformed the benchmark. For more information about alpha, you can visit Investopedia, The Balance, and Morningstar.
See Also
- Beta
- Sharpe Ratio
- Treynor Ratio
- Jensen’s Alpha
- Information Ratio
- CAPM
- Portfolio Return
- Portfolio Risk
- Portfolio Optimization
- Portfolio Theory
