Gregg Greenberg
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What does the term "alpha" mean, and how does one interpret it? Thanks, J.S. Gregg Greenberg: Alpha is the first letter in the Greek alphabet. But in the context of mutual funds, the term alpha may not be as easy to learn as A, B, C. In order to understand alpha, oddly enough, it helps to first understand the concept of beta. Beta is a volatility measure that tells investors how far a mutual fund will fall if the market takes a dive, and, conversely, how high the fund will rise if stocks starts to climb. A fund with a beta greater than 1 is considered more volatile than the market, while a beta of less than 1 means the fund is less volatile. Say your fund has a beta of 1.15. That means it has a history of fluctuating 15% more than the S&P 500. If the market is up, the fund should outperform the index by 15%. If the market heads lower, the fund should fall by 15% more. Alpha tells you how a fund is actually performing compared to its beta. A positive alpha is the extra return awarded to the investor for taking additional risk rather than accepting the market return (or beta). An alpha of 1.0 means the fund outperformed the market 1.0%. The greater the number, the greater the outperformance.
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