Alpha is the excess return of a security, index, or investment program relative to the return of the benchmark index. When speaking of an active investment program or fund, alpha is believed to represent the value a portfolio manager or model adds to or subtracts from a program’s return.

Alpha is a risk-adjusted performance measure since it account for volatility.

Alpha is one of five risk ratios used in modern portfolio theory (MPT) intended as indicators to help investors determine the risk-reward profile of an investment program, fund, index, or security. The other statistical measures are beta, standard deviation, R-squared, and the Sharpe ratio.

Also read: Beta