Alpha

What it means

Return in excess of what the asset’s risk exposures would predict.

The exam angle

Alpha is defined relative to a model. Change the benchmark or add a factor and alpha frequently disappears, which is the whole argument about active management.

Where it appears in the syllabus

• Portfolio ConstructionCFA Level I · exam weight 8–12% · Risk and return, the CAPM, IPS construction, behavioural biases.
• Quantitative MethodsCFA Level I · exam weight 11–14% · Returns and benchmarks, time value, distributions, portfolio maths, regression.
• Performance MeasurementCFA Level III · exam weight 5–10% · Attribution, appraisal, manager selection and the GIPS standards.

Related terms

• Capital market lineThe capital allocation line that runs from the risk-free asset to the market portfolio, the steepest available.
• CorrelationCovariance divided by the product of the two standard deviations, giving a unit-free number between −1 and +1.
• CovarianceA measure of how two variables move together.
• Efficient frontierThe set of portfolios offering the highest expected return for each level of risk.
• Information ratioActive return divided by tracking error — value added per unit of benchmark-relative risk.
• Minimum-variance portfolioThe combination of risky assets with the lowest possible variance.