# Alpha

• Is a measure of the incremental reward (or loss) that an investor gained in relation to the market. Typically, this is measured as performance of a selected portfolio relative to a market benchmark. An enhanced S&P 500 portfolio might have an alpha of .25 which means that the pickup was .25% or a quarter point better than the standard.

• 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.

Embedded terms in definition
Benchmark
Beta
Change
Factor
Index
Investor
Its
Jensen index
Market return
Market
Mutual fund
Pickup
Point
Portfolio
Residual risk
Return
Risk
S&p 500
S&p

Referenced Terms
Alpha equation: The Alpha of a fund is determined as follows: [ (sum of y) -((b)(sum of x)) ] / n where: n =number of observations (36 months) b = beta of the fund x = rate of return for the S&P 500 y = rate of return for the fund

Appraisal ratio: The signal-to-noise ratio of an analyst's forecasts. The ratio of Alpha to residual standard deviation.

Expected excess return: Is equal to the nonmarket or Alpha return plus the beta-adjusted market or systematic return. Since beta relates an asset's return to the market, then the alpha distinguishes it from the market. Algebraically, this is presented by the expression for a straight line or excess return equals a (alpha) + b (beta)X (market return).

Jensen index: An index that uses the capital asset pricing model to determine whether a money manager outperformed a market index. The Alpha of an investment or investment manager.

Statistical analysis: Is a mathematical approach which quantifies market action. In its general form, it is reliant on large sample statistics and linear analysis. It assumes independence. Its popular terms are: the mean, variance, standard deviation, Alpha and beta.

Related Terms
Alpha equation

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