Alpha measures how much a portfolio out- or under-performs its expected return given its market risk (beta). A positive alpha means the manager added value beyond what the market movement alone would explain; a negative alpha means they detracted. It is a core measure of active-management skill.
Formula
Alpha = Actual Return − [Risk-Free Rate + Beta × (Market Return − Risk-Free Rate)]
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Example
A fund returns 14% when CAPM predicts 11% for its risk level. Its alpha is +3%.
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Relevant NISM series
CFANISM Series XV
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