Alpha

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Definition

Alpha is a measure of risk adjusted returns for a given stock or portfolio.

In financial theory, the Capital Asset Pricing Model breaks down expected stock returns into two components. The first is the return that would be expected based on covariance with the movements of the market (for most stocks, when the market as a whole goes up, the price of the stock will also go up). The second part is the increase in the price of a stock that is not explained by the market. This second part of expected returns is a stock's alpha.

For readers with a background in regression analysis, Alpha is the intercept of the linear regression shown in the formula below, where Returns are the return on an individual stock or portfolio, R_f is the risk free rate, R_Market is the return on a market portfolio, and e is an error term.

The following is a table of the benchmark indices used for specific asset classes:

Asset Class	Benchmark Index
US Equity	S&P 500 Total Return [^SPXTR]
International Equity	MSCI ACWI ex USA Net Total Return [^MSACXUSNTR]
Municipal Bond	Barclays Municipal Bond Total Return [^BBMBTR]
Allocation	S&P 500 Total Return [^SPXTR]
Taxable Bond	Barclays US Aggregate Total Return [^BBUSATR]
Commodities	S&P Target Risk Moderate Index [^STRB]
Money Market	S&P Target Risk Moderate Index [^STRB]
Sector Equity	MSCI World Net Total Return [^MSWNTR]
Alternative	MSCI ACWI Net Total Return [^MSACWINTR]

Formula

Returns - R_f = Alpha + Beta x R_Market - R_f + e