In performance measurement, what does Alpha represent?

In performance measurement, what does Alpha represent?

• A. Total return of a portfolio
• B. Excess return relative to a benchmark
• C. Portfolio beta relative to the market
• D. Volatility of returns

Answer: (B)

Alpha measures the portion of a portfolio’s return that isn’t explained by market movement given the portfolio’s risk level. In other words, it’s the excess return relative to a benchmark after accounting for the risk taken (the beta). If a portfolio earns more than what CAPM would predict for its level of systematic risk, it has a positive alpha, meaning the manager added value beyond the market’s moves. If it earns less, alpha is negative. This isn’t the total return itself (that would be the overall performance you see), and it isn’t the portfolio’s beta (which shows sensitivity to the market) or the volatility of returns (which is a measure of risk). Alpha specifically isolates the performance that comes from skill or active management relative to a benchmark.

Alpha measures the portion of a portfolio’s return that isn’t explained by market movement given the portfolio’s risk level. In other words, it’s the excess return relative to a benchmark after accounting for the risk taken (the beta). If a portfolio earns more than what CAPM would predict for its level of systematic risk, it has a positive alpha, meaning the manager added value beyond the market’s moves. If it earns less, alpha is negative.

This isn’t the total return itself (that would be the overall performance you see), and it isn’t the portfolio’s beta (which shows sensitivity to the market) or the volatility of returns (which is a measure of risk). Alpha specifically isolates the performance that comes from skill or active management relative to a benchmark.