Financial Terms / A - B / Alpha (α)

Alpha (α)

You may have heard the term "alpha" used about investing before, but what does it mean? In short, alpha measures how much better (or worse) an investment performs than a benchmark index.

For example, let's say you have a portfolio that consists of stocks and bonds. If the stock market goes up by 10% and your portfolio goes up by 12%, then you have generated 2% alpha. On the other hand, if the stock market goes up by 10% and your portfolio only goes up by 8%, then you have generated -2% alpha.

Generally speaking, the higher the alpha, the better. However, it's important to remember that past performance is not indicative of future results. Just because a particular investment has generated a lot of alpha in the past doesn't necessarily mean that it will continue to do so in the future.