GLOSSARY // Fundamentals
Alpha
Alpha is the excess return an investment or portfolio generates relative to its benchmark, after adjusting for the risk taken (typically measured by beta) to get there. A positive alpha means a manager or strategy beat what you would have expected given the amount of market risk involved; a negative alpha means it fell short.
Alpha is the entire justification for active management and for paying higher fees to a fund manager: an investor could get the market's return for nearly free through an index fund, so any active strategy has to demonstrate consistent, positive alpha to be worth the extra cost, and most do not over long periods.
A fund returns 12% in a year when its beta-adjusted expected return, given the market's 10% return, was 9%. The fund generated 3 percentage points of alpha, outperformance beyond what its risk level alone would predict.
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Educational only — not financial advice. Definitions simplified for clarity; markets are messier than definitions.