What is Alpha?
The return a portfolio earns above what its risk exposure alone would predict — the part not explained by the market or common factors.
Educational — not investment advice
Alpha is the leftover. Once you account for how much of your return came from simply being in the market (beta) and from tilts toward factors like value or momentum, whatever remains is alpha — the value added (or subtracted) beyond those exposures.
Positive alpha is often read as skill; negative alpha as drag. It is the number active managers live and die by, because it isolates their contribution from the market’s.
The trap most people miss
Alpha is slippery: measured over a short window it is mostly noise, and over long windows it tends to shrink toward zero once factors are properly accounted for. Much of what looks like alpha is really an unmeasured factor exposure in disguise.
Frequently asked about Alpha
Is high alpha always good?
High positive alpha looks good, but check the window and whether it survives once factor exposures are removed. Short-run alpha is mostly luck; durable alpha is rare.
What is the difference between alpha and beta?
Beta is how much you move with the market; alpha is the return beyond what beta (and factors) would explain. Beta is exposure; alpha is the residual.
Related terms
Guides that use Alpha
In Tradune: run a Factor X-Ray to see how much of your return is factor exposure vs. alpha.
See your own portfolio’s alpha
Add what you hold and Tradune puts your return next to the benchmark’s, with alpha, beta and correlation measured on your own history.
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This definition is for educational purposes only and is not investment, tax, or financial advice. Concepts are explained in general terms; how they apply to your situation can differ. Always do your own research.