Alpha is a risk-adjusted measure of the "excess return" on an investment. It is commonly used to assess an active manager's performance, as it is the return in excess of a benchmark index or "risk-free" investment.
The alpha coefficient (αi) is a parameter in the capital asset pricing model. In an efficient market, the expected value of the alpha coefficient equals the return of the risk free asset: E(αi) = rf.
αi < rf: the manager has destroyed value
αi = rf: the manager has neither created nor destroyed value
αi > rf: the manager has created value
During the mid 20th century, it was observed that around 75 percent of stock investment managers did not make as much money picking investments, compared to simply invested in every stock in proportion to the market capitalization, or indexing.
Many academics felt that this was due to the stock market being "efficient" and that only luck made it possible for one manager to achieve better results than another.
A belief in efficient markets spawned the creation of index funds that seek to replicate the performance of investing in an entire market. The best examples are the S&P 500 and the Wilshire 5000, accounting for approximately over 80% and 99% of the total capitalization of the US market.
Investors now expect the investment manager to make more money than the passive strategy. The additional return above the expected return of the beta adjusted return of the market is called "Alpha".
- ► 2013 (304)
- ► 2012 (1270)
- ► 2011 (1873)
- ► 2010 (2369)
- ► 2009 (1655)
- ► 2008 (2105)
12/02 - 12/09
- High Oil Price
- Live near your place of work
- Don't Mess Around with Old People
- Alpha (Investment)
- Medical Insurance
- SuperSIV Bailout Fund
- Invest in Low Cost Funds
- Decreasing Term Insurance for the Young
- Financial Planning and Inflation
- Do you really understand structured products?
- No Lock-in Period
- Endowment and whole life products
- Know what you'll get from your investment
- Little Red.SG
- Invest the Difference
- Critical illness premium
- Are you on the sucker's list?
- Avoid ILP policy with high charge
- Mud Flood in Indonesia
- Insurance for a lady
- Term Insurance is guaranteed for the duration
- Articles by Dr Money - MUST READ
- Structured Product with Guaranteed Return
- Remain invested until 90 years old
- Tips on insurance for a new Graduate
- Low cost investment fund
- 9 things to ask your insurance adviser
- Visit the Adviser
- Reduce business costs
- Get adequate coverage
- Traffic accident - How to lodge a claim
- Compensation for Injuries in Traffic Accidents
- Motor Insurance Quote
- Discipline of regular savings
- Measures to improve the taxi service
- Want to buy life insurance?
- Look after the best interest of policyholders
- All you need is $250 a month
- Term to 65
- Secure Portal for Financial Information
- Flexible Savings Plan
- Hidden Expenses of Unit Trusts and ILPs
- Education Fund and Inflation
- Are you paying too much for your insurance?
- Sinking Funds of Town Councils
- Higher Motor Insurance
- Pension in Australia
- Impact of inflation on financial planning
- Invest in Gold
- Life in Taipei
- The 3 Most Timelss Investment Principles
- ▼ 12/02 - 12/09 (51)
- ► 2006 (696)
- ► 2005 (159)