Beta vs Alpha
How much a security moves relative to the overall market. Return above what the portfolio's risk exposure would predict.
What is the difference between Beta and Alpha?
Beta = how much market risk you took. Alpha = how much return you earned beyond what that risk explains.
| Beta | Alpha | |
|---|---|---|
| In one line | How much a security moves relative to the overall market. | Return above what the portfolio's risk exposure would predict. |
| Example | Beta 1.4 implies roughly a 14% move for every 10% market move, in either direction. | A fund returning 12% where beta predicted 10% generated 2% of alpha - before fees. |
| Unit | Risk & Return | Risk & Return |
| Series 65 | Section 1: Economics & Business | Section 1: Economics & Business |
What is Beta?
A beta of 1.0 means the security tends to move with the market. Above 1.0 is more volatile, below 1.0 less. Beta measures only systematic risk and says nothing about whether the return earned for that risk was adequate.
What is Alpha?
The excess return of a manager relative to a benchmark, after adjusting for beta. Positive alpha is the claim active management makes; net of fees it is rare and rarely persistent.