Series 65: Alpha

Taken from our Series 65 Online Guide

Alpha

As discussed above, alpha is a measure of how much better a portfolio of securities performs than what could be expected from the market. A portfolio’s alpha is typically used to evaluate a fund manager’s performance. An alpha of 2% means that the manager was able to add 2 percentage points more to the portfolio return than what would be expected if the fund was not actively managed. An alpha of -3% means that the manager actually cost the portfolio 3% compared to the benchmarks it is measured against. To calculate alpha, subtract the expected return of a portfolio from its actual return. When one is using alpha to evaluate a portfolio, expected returns for each stock are often calculated using the stock’s beta or the capital asset pricing model.

alpha = portfolio’s actual return – port

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