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A
measure of risk, used quite often in mutual funds with regards to
their relation and the market. A positive alpha is the extra return
awarded to the investor for taking a risk, instead of accepting the
market return.
The formula for alpha is:
[ (sum of y) - ((b)(sum of x)) ] / n
n =number of observations (36 mos.)
b = beta of the fund
x = rate of return for the market
y = rate of return for the fund
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An
alpha of 1.0 means the fund outperformed the market 1.0%.
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