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Glossary Term: ALPHA

Definition(s) for ALPHA:


1. ) Alpha measures a stock's average monthly move over the past 12 months if the S&P 500 index is unchanged during this 12-month period. For example, a stock with a high alpha of 7 would be expected to rise 7 0n a month given an unchanged S&P 500 index.

2. ) refers to a measure of a fund's risk-adjusted return. It is calculated by measuring the difference between a fund's actual returns and its expected performance given its level of market risk as measured by beta. An alpha of 1.0 means the fund produced a return 1 0gher than its beta would predict. An alpha of -1.0 means the fund produced a return 10wer. The accuracy of an alpha rating depends on two factors: 1) the assumption that market risk, as measured by beta, is the only risk measure necessary; 2) the strength of fund's correlation to a chosen benchmark such as the S&P 500.

3. ) Alpha is a measurement of the residual risk that an investor takes as a result of investing in a fund rather than in a market index. It represents the difference between a mutual fund's actual performance and the performance that would be expected based on the level of risk taken by the fund's manager. If a fund produced the expected return for the level of risk assumed, the fund is said to have an Alpha of zero. A positive Alpha indicates a return greater than expected for the risk taken. A negative Alpha indicates the manager has not adequately rewarded investors for the risks taken.


See Also:
ALPHA EQUATION, ALPHA JENSEN


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