# Alpha

## What is alpha?

Alpha is a measure of the returns on investment, which may be either more or less than that of the benchmark index on an exchange.

## What is a good alpha?

When a fund manager outperforms the market, it is a good alpha and vice versa. Generally, a positive alpha is a good alpha. For ex:- If alpha is 2.5%, this means that the investment has generated additional returns of 2.5% as compared to the benchmark index.

What is the formula for calculating alpha?

Alpha =Rp- Bp*Rb

A risk-adjusted calculation of excess returns, which will be referred to as alpha, incorporates the risk-adjusted returns of the benchmark with the following formula:-

Where Rp is returns on the portfolio

Bp is the Beta or risk of the portfolio

Rb is the returns on the benchmark

## What is Jensen’s Alpha?

Here the alpha is calculated as the difference between the return predicted by the Capital Asset Pricing Model and the actual returns. A positive Jensen alpha indicates that the portfolio can beat the market, thereby generating higher returns. The formula for Jensen’s Alpha is:-

α = Rp – [Rf + (Rm – Rf) β]

Where Rp = Returns on the portfolio

Rf = Risk free returns

Rm = Market returns

β  = Beta