What is Alpha?
The excess return of an investment above its risk-adjusted benchmark.
Formal Definition
Alpha is the return a portfolio earns beyond what its beta-adjusted exposure to the market would predict. Positive alpha indicates a manager or strategy added value after accounting for risk taken; negative alpha indicates underperformance. It is the headline measure of skill in active management and derives from the Capital Asset Pricing Model.
In Simple Terms
It is the extra return a strategy earns above what you would expect just for riding the market's ups and downs. Positive alpha is the mark of genuine skill rather than luck or simply taking more risk.
Example
If the market returns 10% and a fund with beta 1.0 returns 13%, it generated 3 percentage points of alpha.