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Alpha

Definition: [crh] Measure of risk-adjusted performance. An alpha is usually generated by regressing the security or mutual fund'sDefinition: excess return on the S&P 500 excess return. The beta adjusts for the risk (the slDefinition: ope coefficient). The alpha is the intercept. Example: Suppose the mutual fund has a return of 25%, and the short-term interest rate iDefinition: s 5% (excess return is 20%). During the same time the market excess return is 9%. Suppose the beta of the mutual fund is 2.0 (twice as risky as the S&P 500). The Definition: REF="/?rd=expected excess+return">expected excess return given the risk is 2 x 9%=18%. The actual excess return is 20%. Hence, the alpha is 2% or 200 basis pointsDefinition: . Alpha is also known as the Jensen Index. Related: Risk-adjusted return.

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