Alpha

Alpha is used in investing to describe an investment strategy’s ability to beat the market. Alpha is often referred to as excess or abnormal rate of return. If the markets are efficient, theoretically there is no way to earn returns that exceed the market as a whole, and therefore any alpha returns are excess, meaning higher than the return of the market. Investment strategies that produce alpha returns are often associated with increased risk or volatility. As a result, alpha is often used with Beta, which measures the market or an asset’s overall volatility or risk. Alpha is used in finance as a measure of a strategy, trader, or portfolio manager’s performance, indicating when a trader gains over the general trend of an asset or market over a period of time. The excess return of an investment, relative to the return of a benchmark index, is the investment’s alpha. Alpha may be positive or negative.