How can the alpha coefficient be best defined?

How can the alpha coefficient be best defined?

• A. Relative sensitivity of a stock's return to the market's return
• B. Measure of issue-specific risk related to number of dissimilar issues held
• C. Estimate of range around the expected rate of return
• D. Difference of the expected return versus its actual return

Answer: (D)

The alpha coefficient is best defined as the difference between the expected return of an investment and its actual return. This metric is essential in assessing the performance of a portfolio or a mutual fund compared to a benchmark index. A positive alpha indicates that the investment has outperformed its benchmark, while a negative alpha suggests underperformance. By focusing on the actual return versus the expected return, alpha measures the value added by an active portfolio management strategy over a passive investment strategy. In this way, alpha is a critical tool for investors looking to evaluate their investments' performance relative to market movements. Understanding alpha allows investors to gauge the effectiveness of their investment strategies and make informed decisions about future investments.

The alpha coefficient is best defined as the difference between the expected return of an investment and its actual return. This metric is essential in assessing the performance of a portfolio or a mutual fund compared to a benchmark index. A positive alpha indicates that the investment has outperformed its benchmark, while a negative alpha suggests underperformance.

By focusing on the actual return versus the expected return, alpha measures the value added by an active portfolio management strategy over a passive investment strategy. In this way, alpha is a critical tool for investors looking to evaluate their investments' performance relative to market movements. Understanding alpha allows investors to gauge the effectiveness of their investment strategies and make informed decisions about future investments.