Alpha
Return above what the investment's market exposure (beta) alone would have earned.
Formula
Alpha = Return − [Risk-free + Beta × (Market return − Risk-free)]
Inputs
- Return. The investment's annualized return.
- Beta. Its sensitivity to the market.
- Market return. The benchmark's annualized return.
How to read it
Positive alpha is return the market does not explain; negative alpha is return given up. It is a statement about the past period only.
How to use it
Separates skill or a different strategy from simply carrying more market exposure.
Limitations
Only as good as the beta under it; a low R² makes it unreliable.
In Kereon
Portfolio. Annualized (mean daily × 252) portfolio return minus the expectation above, using the risk-free rate you set and the portfolio's beta to the chosen benchmark.
Investing · price record. Over the last 252 sessions against the benchmark: (mean daily return − beta × the benchmark's mean daily return) × 252, with no risk-free rate.
Also called: alpha, alpha (annual), alpha (1y, ann).