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Glossary
Alpha measures excess return of an investment relative to a benchmark, adjusted for risk, indicating manager skill or strategy edge.
Positive alpha means a fund beat its benchmark after adjusting for market risk; negative alpha means it underperformed.
In CAPM framework, Alpha = Portfolio Return − [Risk-free Rate + Beta × (Benchmark Return − Risk-free Rate)]. Positive alpha suggests value added beyond market exposure, though persistence is debated.
If Nifty 50 returned 12%, risk-free rate was 7%, fund beta is 1.1, and the fund returned 16%, alpha is roughly 16% − [7% + 1.1 × (12% − 7%)] = 3.5%.
Alpha = Rp − [Rf + β × (Rm − Rf)]Yes. If the fund gained 10% but the benchmark gained 15% after risk adjustment, alpha can be negative despite positive absolute returns.
Alpha can be noisy over short periods. Evaluate consistency across market cycles, expense ratio, and process rather than one-year alpha alone.
Index funds aim for zero alpha before costs. After expense ratio, they typically show slight negative alpha versus the index they track.