Alpha

What is Alpha?

Alpha is the part of an asset's or strategy's return that its market exposure does not explain. In Jensen's classic formulation, regress the asset's returns in excess of the risk-free rate on the benchmark's excess returns using linear regression: the slope of that fit is beta, and the intercept is alpha. Positive alpha means the asset earned more over the window than its benchmark sensitivity alone would have predicted; negative alpha means it earned less.

Alpha is an estimate, not a property. It changes with the benchmark chosen, the lookback window, and the return frequency, and short-window readings are noisy. Chart and screener implementations usually compute it as a rolling regression intercept against a reference index, which makes it a relative-performance lens: it shows who is outrunning their market exposure right now, with no promise the outrunning continues.

How traders use it

• Screening: ranking symbols by rolling alpha against an index surfaces names outperforming beyond what their beta explains, a shortlist for further work rather than a buy list.
• Strategy evaluation: computing alpha on backtest returns separates timing or selection skill from returns that are simply market exposure in disguise; a system with high raw returns and near-zero alpha is mostly repackaged beta.
• Portfolio reads alongside beta: near-zero beta with positive alpha describes a return stream largely independent of the index, very different from a high-beta book with the same headline return.