Alpha is a financial metric that measures an investment’s performance compared to a market benchmark, showing how much extra return is generated above or below the market.
Alpha is commonly used in mutual funds, stocks, and portfolio management to evaluate the skill of a fund manager or investment strategy. It represents the excess return earned after adjusting for market risk.
A positive alpha means the investment has performed better than its benchmark index, while a negative alpha indicates underperformance. If alpha is zero, the investment has performed exactly in line with the market.
Investors use alpha to compare mutual funds or portfolios with similar risk levels. However, alpha should not be viewed alone; it works best when analyzed along with other metrics like beta, standard deviation, and risk-adjusted returns.
"If a mutual fund delivers a return of 14% while its benchmark index returns 12%, the fund has an alpha of +2%, indicating it outperformed the market."