Alpha is a risk-adjusted measure of the so-called "excess return" on an investment. It is a common measure of assessing active manager's performance as it is the return in excess of a benchmark index or "risk-free" investment. To meet Wikipedias quality standards, this article may require cleanup. ... Alpha is a risk-adjusted measure of the so-called excess return on an investment. ... Invest redirects here. ... Active management refers to a portfolio management strategy where the manager makes specific investments with the goal of outperforming a benchmark index. ...

The difference between the fair and actually expected rates of return on a stock is called the stock's alpha. It has been suggested that shareholder be merged into this article or section. ...

The alpha coefficient (α_i) is a parameter in the capital asset pricing model. In fact it is the intercept of the Security Characteristic Line (SCL). One can prove that in an efficient market, the expected value of the alpha coefficient equals the return of the riskfree asset: E(α_i) = r_f. An estimation of the CAPM and the Security Market Line (purple) for the Dow Jones Industrial Average over the last 3 years for monthly data. ... In mathematics, a root (or a zero) of a function f is an element x in the domain of f such that f(x) = 0. ... Capital Market Line Modern portfolio theory (MPT) proposes how rational investors will use diversification to optimize their portfolios, and how an asset should be priced given its risk relative to the market as a whole. ... In finance, the efficient market hypothesis (EMH) asserts that stock prices are determined by a discounting process such that they equal the discounted value (present value) of expected future cash flows. ...

Therefore the alpha coefficient can be used to determine whether an investment manager or firm has created economic value:

• α_i < r_f: the manager or firm has destroyed value
• α_i = r_f: the manager or firm has neither created nor destroyed value
• α_i > r_f: the manager or firm has created value

The difference α_i − r_f is called Jensen's alpha. In finance, Jensens alpha (or Jensens Performance Index) is used to determine the excess return of a stock, other security, or portfolio over the securitys required rate of return as determined by the Capital Asset Pricing Model. ...

Origin of the concept

The concept and focus on Alpha comes from an observation increasingly made during the middle of the twentieth century, that around 75 percent of stock investment managers did not make as much money picking investments as someone who simply invested in every stock in proportion to the weight it occupied in the overall market in terms of market capitalization, or indexing. Many academics felt that this was due to the stock market being "efficient" which means that since so many people were paying attention to the stock market all the time, the prices of stocks rapidly moved to the correct price at any one moment, and that only luck made it possible for one manager to achieve better results than another, before fees or taxes were considered. A belief in efficient markets spawned the creation of market capitalization weighted index funds that seek to replicate the performance of investing in an entire market in the weights that each of the equity securites comprises in the overall market. The best examples are the S&P 500 and the Wilshire 5000 which approximately represent the 500 largest equties and the largest 5000 securities respectively, accounting for approimately 80%+ and 99%+ of the total market capitalization of the US market as a whole. (19th century - 20th century - 21st century - more centuries) Decades: 1900s 1910s 1920s 1930s 1940s 1950s 1960s 1970s 1980s 1990s The 20th century lasted from 1901 to 2000 in the Gregorian calendar (often from (1900 to 1999 in common usage). ... A percentage is a way of expressing a proportion, a ratio or a fraction as a whole number, by using 100 as the denominator. ... Investment is a term with several closely related meanings in finance and economics. ... An index fund or index tracker is a collective investment scheme that aims to replicate the movements of an index of a specific financial market. ... The New York Stock Exchange A stock market is a market for the trading of company stock, and derivatives of same; both of these are securities listed on a stock exchange as well as those only traded privately. ... In finance, the efficient market hypothesis (EMH) asserts that financial markets are efficient, or that prices on traded assets, e. ...

In fact, to many investors, this phenomenon created a new standard of performance that must be matched: an investment manager should not only avoid losing money for the client and should make a certain amount of money, but in fact should make more money than the passive strategy of investing in everything equally (since this strategy appeared to be statistically more likely to be successful than the strategy of any one investment manager). The name for the additional return above the expected return of the beta adjusted return of the market is called "Alpha".

Relation to beta

Besides an investment manager simply making more money than a passive strategy, there is another issue:

Although the strategy of investing in every stock appeared to perform better than 75 percent of investment managers, 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.

The passive strategy appeared to generate the market-beating return over periods of 10 years or more. This strategy, however, is risky for those who feel they might need to withdraw their money before a 10-year holding period, for example. Thus investment managers who employ a strategy which is less likely to lose money in a particular year are often chosen by those investors who feel that they might need to withdraw their money sooner. The measure of how volatile an investment (or an investment manager's track record) is compared to the entire market is called beta. There are very few or no other articles that link to this one. ... Volatility most frequently refers to the standard deviation of the change in value of a financial instrument with a specific time horizon. ... The Beta coefficient, is a key parameter in the Capital asset pricing model (CAPM). ...

• A beta of 1 means that the investment manager's performance has been just as volatile as the market
• a beta of 0.5 means that the manager's performance has been half as volatile
• a beta of 1.5 means that performance has been 50 percent more volatile.

Investors ought to judge a manager's performance by both alpha and beta. If the manager has had a high alpha, but also a high beta, investors might not find that acceptable, because of the chance they might have to withdraw their money when the investment is doing poorly.

These concepts not only apply to investment managers, but to any kind of investment.

External links

• Portfolio Analysis With Linear Regression - Applying the capital asset pricing model to portfolio performance analysis.