Alpha
Candlefocus EditorAlpha is a measure of the performance of a portfolio compared to a benchmark index. Generally, when a portfolio manager earns positive alpha, it means that the manager has added value to the portfolio. To calculate alpha, the performance of a portfolio is measured against a benchmark, such as the S&P 500, and the returns of this benchmark are subtracted from the returns of the portfolio. If the portfolio has out-performed the benchmark index, then the portfolio has produced a positive alpha.
The importance of alpha in portfolio management has grown in recent years. Active managers are now increasingly focusing on outperforming the benchmark using strategies such as investment diversification and more efficient portfolio diversification. Alpha is a measure of a manager’s skill in selecting stocks and creating income-generating investmentswith lower risk. Alpha can also be used to indicate how much risk the portfolio is taking as well as how skilled the portfolio manager is in controlling that risk.
Jensen’s alpha is a variation of alpha which takes into consideration the capital asset pricing model (CAPM). The CAPM is a useful tool used to calculate the expected return of a security based on its risk. Thus, Jensen’s alpha measures the return of a portfolio relative to the return that would have been expected from the traditional CAPM analysis.
Positive alpha is an important goal for portfolio managers. It is a measure of the added value that an actively managed portfolio can offer an investor. Achieving positive alpha is essential for any manager to prove that their decisions and strategies provide higher returns than the average investor. Alpha can be used by investors to examine and compare the performance of different managers, which can help them to make decisions about who to invest with.