Risk and return · updated October 21, 2026
What is alpha in investing and how is it calculated
Alpha shows how much more (or less) a stock or a fund earned than it normally should have, given how much it moves with the market. An alpha of +2% means 2 percentage points a year above what the risk taken would justify.
Alpha formula
- Actual return
- What the investment earned in a year, dividends included.
- Risk-free rate
- The interest on short-term government bills.
- Beta
- How much the investment moves relative to the market.
- Market return
- What the benchmark index (S&P 500, Euro Stoxx 50) earned over the same period.
Worked example
A fund returned 14% in a year. The market returned 10%, government bills 4%, and the fund's beta is 1.2.
For the risk it took, the fund should have returned 11.2%. It returned 14%, so it earned 2.8 points extra.
How to read alpha
Most actively managed funds have a negative alpha over the long run, after fees. That is why many investors choose index funds, which track the market at low cost.
When alpha can fool you
A lucky year: alpha over a single year says little; what counts is whether it repeats over 5-10 years. Wrong benchmark: a small-cap fund compared with the S&P 500 can show an alpha that comes only from owning a different kind of stock.
Related terms
Learn it in the Academy
Questions about alpha
What is a good alpha for a fund?
Any positive alpha kept up for several years, after fees, is rare and valuable. A steady +1% a year is already very good.
Are alpha and beta related?
Yes. Beta tells you how much market risk the investment carries, and alpha tells you what it earned beyond what that risk deserved.
These explanations are for information only. They are not a recommendation to buy or sell.
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