Home >Money >Personal Finance >Alpha reflects the skill of a fund manager

Alpha is the excess return that a fund or portfolio generates compared to its benchmark, after adjusting for risk. A fund can generate returns in two ways—alpha and beta. Beta is the volatility of a fund compared to the market. A high beta portfolio is tailored towards generating additional returns by taking additional risks. Alpha, on the other hand, typically comes from the skill exercised by the fund manager. It is thus a more accurate measure of a fund manager’s skill than beta. It can be positive or negative with a negative figure denoting a fund manager who is doing worse than the market.

Other things being equal, investors prefer a high alpha fund to a low alpha one.

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