What is Alpha?
Alpha in stocks is a measure used by investors to assess the performance of their portfolios relative to the market. Alpha measures the difference between the expected return on a portfolio, based on its level of risk as measured by beta, and the actual return the investor has achieved.
What does positive and negative alpha mean?
A positive alpha value indicates that a portfolio has outperformed its benchmark index; conversely, a negative alpha reflects underperformance relative to the benchmark.
Importance of Alpha
Alpha is one of the most important tools used by investors when constructing and managing portfolios. High levels of alpha can be indicative of active managing skills, while low alpha values suggest that passive management techniques are being employed. Alpha also helps investors judge how much risk they will have to take in order to achieve certain returns. As such, it is an extremely useful tool for determining which investments to make and when.