Alpha is a security’s return above the return predicted by its benchmark or model.
In investment analysis, alpha is commonly used to describe performance not explained by exposure to a benchmark or risk factors. A positive alpha suggests that the investment outperformed the model’s expected result over the measured period, while a negative alpha suggests underperformance. The exact calculation depends on the benchmark and model used.
Alpha should not be treated as a permanent personal skill score. Results can be affected by fees, taxes, measurement choices, survivorship bias, and luck. It is also distinct from beta: beta measures sensitivity to broad market movements, while alpha concerns residual performance after accounting for the selected risk exposure. Comparing alpha across funds requires consistent time periods, benchmarks, and return definitions.