A mathematical estimate of the amount of return expected from an investment's inherent values, such as the rate of growth in earnings per share. It is distinct from the amount of return caused by volatility, which is measured by the beta coefficient. An alpha coefficient of 1.30 indicates a stock is projected to rise 30% in price in a year when the return on the market and the stock's beta coefficient are both zero. When an investment price is low relative to its alpha, it is undervalued and considered a good selection. In the case of a mutual fund, alpha measures the relationship between a fund's performance and its beta over a three-year period.
Measures volatility where the reasons for fluctuations are due to the investment vehicle itself, not from market conditions. For example, a stock with an alpha factor of 1.25 is projected to rise in price by 25% in a year regardless of the performance of the market as a whole.
A measure of the contribution that a portfolio manager makes to the performance of an investment portfolio, i.e., performance over and above that which can be attributed to general market performance. If the alpha is positive, it points to evidence of superior performance. If the alpha is negative, there is evidence of inferior performance. If the alpha hovers around zero, it shows that the portfolio manager has matched the market.