Alpha
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. |
Similar financial terms
Alpha equationThe 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)
