Defining alpha

May 28, 2009

One of the more challenging and interesting aspects of being a financial journalist is trying to define terms like convexity and covariance for a lay audience — it’s not easy. So I was particularly taken with Justin Fox’s one-sentence definition of alpha in his new book on the efficient markets hypothesis:

Alpha is a portfolio’s performance minus the performance of a hypothetical benchmark portfolio of equivalent risk.

Elegant, eh? It’s a shame, in a way, that it arrived just as the reputation of CAPM is hitting new lows and the race for alpha is looking increasingly laughable.


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