What is Alpha?

Definition Alpha: In finance the Greek letter Alpha (α) describes the active return of an investment. Active return means the excess return the investment generated compared to a benchmark (general market performance).

Alpha = Investment-Performance - Benchmark-Performance

 

Use of Alpha

In practice alpha is often used in the investment-fund industry. The alpha describes the excess return a fund achieved compared to its benchmark. If the fund achieved a better performance than the benchmark, he can deliver an outperformance (or excess-return). The alpha is positive. If The fund delivered less return than the benchmark, the alpha is negative. For a passive managed fund like Index-Funds and ETFs, the alpha is close to 0.