| Alpha | |
 1. A measure of a mutual fund's risk relative to the market. The formula for alpha is the following: [ (sum of y) - ((b)(sum of x)) ] / n Where: n = number of observations (36 mos.) b = beta of the fund x = rate of return for the market y = rate of return for the fund 2. The abnormal rate of return on a security or portfolio in excess of what would be predicted by an equilibrium model like the Capital Asset Pricing Model (CAPM). |
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 1. An alpha of 1.0 means the fund outperformed the market 1.0%. A positive alpha is the extra return awarded to the investor for taking additional risk rather than accepting the market return. 2. If a CAPM analysis estimates that a portfolio should earn 10% based on the risk of the portfolio but the portfolio actually earns 15%, then the alpha of the portfolio would be 5%. This 5% is the excess return over what was predicted in the CAPM model. |
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 Understanding Volatility Measurements - How do you choose a fund with an optimal risk-reward combination? We teach you about standard deviation, beta and more! A Statistical View of Mutual Funds - Understanding the technical jargon of mutual funds isn't easy, but try and you could reap some rewards. Mutual Fund Basics Tutorial - Learn about the basics--and the pitfalls!--of investing in mutual funds. |
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