Alpha
The return earned above what an asset's risk exposure would have predicted.
Formula
Alpha = Actual Return - [Risk-Free Rate + Beta x (Market Return - Risk-Free Rate)]
Unit
%
In depth
Alpha is what remains after the return explained by market exposure is stripped out, which makes it the measure of skill rather than of exposure. It is model-dependent: alpha computed against a single-factor model can vanish entirely when size, value and momentum factors are added, meaning the apparent skill was really an exposure nobody had adjusted for. It must also be measured net of fees and costs, since a strategy generating 2% of gross alpha and charging 2.5% delivers negative alpha to its investors. In aggregate alpha is close to zero before costs and negative after them, because all investors together hold the market.
Worked example
A fund returns 18% while the market returns 12% with a risk-free rate of 7% and a fund beta of 1.2. Expected return = 7 + 1.2 x 5 = 13%, so alpha is 18 - 13 = 5 percentage points before fees.
Illustrative figures, chosen so the arithmetic is easy to follow. Not a live price and not a valuation of any company.
Educational reference only
This entry explains what “Alpha” means. It is not investment advice and not a recommendation to buy or sell any security. Any numbers above are illustrative, not live prices, and nothing here predicts price direction or rates a stock. Consider your own circumstances and consult a SEBI-registered investment adviser before acting.