In finance, alpha is a performance metric used to evaluate whether an investment delivered results above what the market alone would have produced. To calculate alpha, an investment’s return is compared to a benchmark index that represents the broader market or its specific category.
If an investment has a positive alpha, it means the strategy produced better results than the benchmark. A negative alpha means the performance fell short of the benchmark. Alpha is often used to assess active managers, trading strategies, or algorithmic systems because it isolates skill-based return from market-driven return.
Alpha can also include adjustments for risk. Many models, including the Capital Asset Pricing Model (CAPM), compare actual returns to expected returns based on risk exposure. This helps determine whether a strategy truly generated excess performance or simply took on more risk.
Alpha helps investors understand whether a strategy is genuinely adding value. It is a core measurement in portfolio analysis, evaluating fund managers, and comparing different trading approaches.
Alpha is calculated by subtracting the expected return (based on a benchmark or risk model) from the actual return. A positive number means the strategy outperformed; a negative number means it underperformed.
A good alpha is generally a positive one, indicating performance above the benchmark. However, the acceptable level depends on risk exposure, strategy type, and market conditions.
A fund returns 12% for the year, while its benchmark index returns 9%. After adjusting for risk, the strategy shows an alpha of +2%, meaning it generated additional return beyond what the market provided.
FinFeedAPI supports alpha analysis by providing reliable historical prices, benchmark data, and market fundamentals through the Stock API and Currency API. Developers use this data to calculate alpha, build performance models, and evaluate the effectiveness of trading strategies or automated systems.
