Alpha
Return above what the portfolio's risk exposure would predict.
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.
Alpha: a worked example
A fund returning 12% where beta predicted 10% generated 2% of alpha - before fees.
More terms in Risk & Return
Systematic Risk (Market Risk)
Risk affecting the whole market that diversification cannot remove.
Unsystematic Risk (Specific Risk)
Company- or industry-specific risk that diversification can eliminate.
Beta
How much a security moves relative to the overall market.
Standard Deviation
How widely returns disperse around their average.
Sharpe Ratio
Excess return per unit of total volatility.
Correlation
How closely two assets move together, from -1 to +1.
Diversification
Spreading capital across assets so no single failure is fatal.
Maximum Drawdown
The largest peak-to-trough decline over a period.