Alpha Coefficient

Coefficient measuring the portion of an investment’s return arising from specific non-market risk. It is a mathematical estimate of the amount of return expected for an investment’s inherent values, such as the rate of growth in earnings-per-share. An investment whose price is low relative to its alpha is undervalued and considered a good selection. A positive alpha of 1.0 means the fund has outperformed its benchmark index by 1%. Correspondingly, a similar negative alpha would indicate an underperformance of 1%.

The coefficient is a parameter in Capital Asset Pricing Model (CAPM). If a CAPM analysis estimates that a portfolio should earn 10% based on the risk of the portfolio but the portfolio actually earns 15%, the portfolio's alpha would be 5%. This 5% is the excess return over what was predicted in the CAPM model.