“Alpha” (the Greek letter α) is a term used in investing to describe a strategy’s ability to beat the market, or it’s “edge.” Alpha is thus also often referred to as “excess return” or “abnormal rate of return,” which refers to the idea that markets are efficient, and so there is no way to systematically earn returns that exceed the broad market as a whole.
Alpha is used in finance as a measure of performance, indicating when a strategy, trader, or portfolio manager has managed to beat the market return over some period. Alpha, often considered the active return on an investment, gauges the performance of an investment against a market index or benchmark that is considered to represent the market’s movement as a whole. The excess return of an investment relative to the return of a benchmark index is the investment’s alpha. Alpha may be positive or negative and is the result of active investing.
Alpha is the measurement of investment performance as compared to an index such as S&P BSE Sensex of Nifty.
Alpha is an investment’s active return which is directly related to the investment decision.
Alpha will be zero if the investment performs in line with the benchmark.
If an investment has an alpha value of 1, this means that it has outperformed the comparison market index or benchmark by 1% and if it is -2, it means that the investment has underperformed by 2%.
Alpha is a key number to look at in active investment strategy.