What does Alpha represent in investment terms?

Alpha in investment terms represents the difference between the actual return of an investment and the expected return. It is a measure used to evaluate the performance of an investment relative to a benchmark or market index. A positive alpha indicates that the investment has outperformed the benchmark, while a negative alpha suggests underperformance.

The calculation of alpha helps investors determine whether a portfolio manager is adding value beyond what would be expected based on the level of risk taken. This is particularly useful in assessing active management strategies, as it reveals whether any excess returns are due to skill or just random chance.

In using alpha, investors can make more informed decisions about their investments and adjust their strategies accordingly, aiming for higher returns while managing the risks involved.