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 marketbased 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 signaltonoise 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 betaadjusted 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
