# Alpha (finance)

**alphaexcess returnoutperform market averagesAlpha (investment)alpha factoralpha generating strategieseconomic alphareturn in excess of the compensation for the risk bornestandard alpha**

Alpha is a measure of the active return on an investment, the performance of that investment compared with a suitable market index.wikipedia

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### Modern portfolio theory

**portfolio theoryportfolio analysismean-variance**

Alpha, along with beta, is one of two key coefficients in the capital asset pricing model used in modern portfolio theory and is closely related to other important quantities such as standard deviation, R-squared and the Sharpe ratio.

where α i is called the asset's alpha, β i is the asset's beta coefficient and SCL is the security characteristic line.

### Jensen's alpha

**alphaJensen**

Returns on that portfolio can be compared with the theoretical returns, in which case the measure is known as Jensen's alpha.

It is a version of the standard alpha based on a theoretical performance index instead of a market index.

### Sharpe ratio

**risk-adjusted returnrisk adjusted returnSharpe diagonal (or index) model**

Alpha, along with beta, is one of two key coefficients in the capital asset pricing model used in modern portfolio theory and is closely related to other important quantities such as standard deviation, R-squared and the Sharpe ratio.

We typically do not know if the asset will have this return; suppose we assess the risk of the asset, defined as standard deviation of the asset's excess return, as 10%.

### Beta (finance)

**betabeta coefficient beta coefficient**

Alpha, along with beta, is one of two key coefficients in the capital asset pricing model used in modern portfolio theory and is closely related to other important quantities such as standard deviation, R-squared and the Sharpe ratio.

where r a is the return of the asset, alpha (α) is the active return, and r b is return of the benchmark.

### Security characteristic line

The slope of the SCL is the security's beta, and the intercept is its alpha.

### Hedge fund

**hedge fundshedge fund managerhedge-fund**

Historically, the vast majority of traditional funds have had negative alphas, which has led to a flight of capital to index funds and non-traditional hedge funds.

There is a debate over whether alpha (the manager's skill element in performance) has been diluted by the expansion of the hedge fund industry.

### Active return

Alpha is a measure of the active return on an investment, the performance of that investment compared with a suitable market index.

### Investment

**Investmentsinvestingcapital investment**

Alpha is a measure of the active return on an investment, the performance of that investment compared with a suitable market index.

### Stock market index

**stock indexindexstock market indices**

Alpha is a measure of the active return on an investment, the performance of that investment compared with a suitable market index.

### Return on investment

**ROIreturnreturns**

An alpha of 1% means the investment's return on investment over a selected period of time was 1% better than the market during that same period; a negative alpha means the investment underperformed the market.

### Capital asset pricing model

**CAPMCapital Asset Pricing Model (CAPM)CAPM model**

### Standard deviation

**standard deviationssample standard deviationSD**

### Coefficient of determination

**R-squaredR'' 2 R 2**

### Index fund

**Index investingindex fundsindex**

In modern financial markets, where index funds are widely available for purchase, alpha is commonly used to judge the performance of mutual funds and similar investments. although the strategy of investing in every stock appeared to perform better than 75 percent of investment managers (see index fund), the price of the stock market as a whole fluctuates up and down, and could be on a downward decline for many years before returning to its previous price.

### Mutual fund

**mutual fundsfundfunds**

In modern financial markets, where index funds are widely available for purchase, alpha is commonly used to judge the performance of mutual funds and similar investments.

### Capital flight

**flight of capitalcapital moved outfled the country**

Historically, the vast majority of traditional funds have had negative alphas, which has led to a flight of capital to index funds and non-traditional hedge funds.

### Efficient-market hypothesis

**efficient market hypothesisefficient marketmarket efficiency**

It can be shown that in an efficient market, the expected value of the alpha coefficient is zero.

### Market portfolio

**realized returnoverall marketportfolio**

### Risk-free interest rate

**risk-free raterisk free raterisk-free asset**

### S&P 500 Index

**S&P 500S&P 500 ComponentS&P500**

The best examples for the US are the S&P 500 and the Wilshire 5000 which approximately represent the 500 most widely held equities and the largest 5000 securities respectively, accounting for approximately 80%+ and 99%+ of the total market capitalization of the US market as a whole.

### Wilshire 5000

**Dow Jones Wilshire 5000Wilshire 5000 stock index**

The best examples for the US are the S&P 500 and the Wilshire 5000 which approximately represent the 500 most widely held equities and the largest 5000 securities respectively, accounting for approximately 80%+ and 99%+ of the total market capitalization of the US market as a whole.

### Expected return

The name for the additional return above the expected return of the beta adjusted return of the market is called "Alpha".

### Volatility (finance)

**volatilityvolatileprice volatility**

although the strategy of investing in every stock appeared to perform better than 75 percent of investment managers (see index fund), the price of the stock market as a whole fluctuates up and down, and could be on a downward decline for many years before returning to its previous price.