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Investing Glossary:
Alpha
Copyright 2010,
Campbell R. Harvey. All Rights Reserved.
Do not reproduce without explicit permission.
- A -
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| Definition: |
| The premium an Investment earns above a set standard. This is usually measured in terms of the Dow Industrials or the SP 500. How the Stock performs independent of the market. Measure of risk-adjusted performance. An Alpha is usually generated by regressing the security or mutual fund`s excess return On the S&P 500 excess return. The Beta adjusts for the Risk (the slope coefficient). The alpha is the intercept. Example: Suppose the mutual fund has a Return of 25%, and the short-term Interest rate is 5% (excess return is 20%). During the same time the Market excess return is 9%. Suppose the beta of the mutual fund is 2.0 (twice as risky as the S&P 500). The expected excess return given the risk is 2 x 9%=18%. The actual excess return is 20%. Hence, the alpha is 2% or 200 Basis points. Alpha is also known as the Jensen Index. Related: Risk-adjusted return.
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