Alpha

Alpha is a measure of stock performance adjusted based on risk. Alpha takes mutual fund volatility (price risk) and compares its risk-adjusted performance to a benchmark index. Alpha is the fund's excess return relative to benchmark index return.

The formula to calculate alpha is a = Ri-b*Rm. Say a stock has a 30 percent return, 5 percent of which is the interest rate and 25 percent is the excess return (Ri). Market return is 10 percent (Rm), and beta (b) is 2. The risk associated with the stock is 18 percent. The stock's alpha is 5 percent, from 25 percent (actual return) – 20 percent (risk associated with the stock).

A positive alpha of 1 means the stock has outperformed its benchmark index by 1%, while a negative 1 alpha indicates a 1% underperformance.