What does alpha quantify in performance assessment?

What does alpha quantify in performance assessment?

• A. Market risk
• B. Return above or below what is expected given risk
• C. Liquidity risk
• D. Fees

Answer: (B)

In performance assessment, alpha measures the portion of a portfolio’s return that cannot be explained by market movements after adjusting for risk. It represents the risk-adjusted excess return—the amount by which the portfolio outperforms (positive alpha) or underperforms (negative alpha) the return predicted by its level of risk (its beta) with a chosen benchmark. Think of it as the intercept you’d see if you regressed the portfolio’s returns on the market. A positive alpha means the manager added value beyond what the market and the portfolio’s risk would predict; a negative alpha means underperformance after accounting for risk. This is distinct from market risk (beta) itself, liquidity risk (which is about how easily assets can be traded), or fees (which reduce realized returns but don’t measure excess performance relative to risk).

In performance assessment, alpha measures the portion of a portfolio’s return that cannot be explained by market movements after adjusting for risk. It represents the risk-adjusted excess return—the amount by which the portfolio outperforms (positive alpha) or underperforms (negative alpha) the return predicted by its level of risk (its beta) with a chosen benchmark.

Think of it as the intercept you’d see if you regressed the portfolio’s returns on the market. A positive alpha means the manager added value beyond what the market and the portfolio’s risk would predict; a negative alpha means underperformance after accounting for risk.

This is distinct from market risk (beta) itself, liquidity risk (which is about how easily assets can be traded), or fees (which reduce realized returns but don’t measure excess performance relative to risk).