All Ordinaries Index

Measure of risk adjusted performance. An alpha is usually generated by regressing the security or mutual funds excess return on the S&P 500 excess return. The beta adjusts for the risk (the slope coefficient). The alpha is the intercept. Example: Suppose the mutual fund has a return of 23% and the short-term interest rate is 5% (excess return is 20%). During the same time the market excess return is 9%. Suppose the beta of the mutual fund is 2.0 (twice as risky as the S&P 500). The expected return given the risk is 2x9%=18%. The actual excess return is 20%. Hence, the alpha is 2% or 200 basis points. Alpha is also know as Jensen Index. Related: Risk adjusted return.