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Alpha
Alpha is a technical risk ratio, a statistical measurement used in modern portfolio theory, whose main purpose is to help investors determine risk/reward potentials of a mutual fund. It is the value a portfolio manager subtracts and adds to a fund’s returns.
Alpha is calculated by taking price risk (volatility) of a mutual fund and comparing its risk-adjusted performance to performance of a benchmark. The difference between returns of the fund and returns of the benchmark is fund's alpha.
The alpha of a fund is determined as follows:
[(sum of y)-((b)(sum of x))] / n
where: n =number of observations (36 months)
b = beta of the fund
x = rate of return for the S&P 500
y = rate of return for the fund
Other technical risk ratios are Sharpe ratio, Beta, standard deviation and R-squared.
| Related Terms: Alpha Generator |