Glossary · Defined term
Alpha
Alpha is the excess return of an investment versus what its market exposure alone would predict, often used to judge manager skill.
Last updated Oct 2, 2026
What it means
Alpha measures the excess return of an investment compared with what its market exposure alone would predict. The standard framework is the capital asset pricing model: given a stock's beta, the model predicts an expected return, and alpha is the difference between the actual return and that prediction. A positive alpha means the investment beat its risk-adjusted expectation; a negative alpha means it fell short. Fund managers are often judged on alpha because it separates skill (or luck) from simply riding the market up or down. Alpha is usually annualized and quoted relative to a stated benchmark, such as the S&P 500.
An example
For illustration, suppose a stock returns 12 percent in a year when its beta of 1.2 predicts a 10 percent return given the market's performance. Its alpha is roughly 2 percentage points: it earned 2 points more than its market risk alone would explain. That 2 points is the part a manager might claim as skill.