Last Updated on 21 September, 2020 by Therobusttrader
Alpha is a performance metric that is used to gauge the performance of mutual funds. The alpha works by comparing the return of the investment to a benchmark index, such as the S&P 500.
If the Alpha is under 1, the mutual fund has underperformed against the benchmark index. Conversely, if the alpha is higher than 1, the investment has overperformed against the benchmark index.
Alpha is often used together with beta in order to bring volatility into consideration.
Another modified version of alpha is Jensen’s alpha.