Alpha (investment)

The alpha factor ( α ) ( Jensen Alpha, Jensen's alpha) referred to in the financial market theory, the measure of excess returns ( positive alpha ) or a lower yield ( negative alpha ) of a plant, compared to a reference value ( the benchmark). The alpha factor, equivalent to the part of the stock return, which is independent of the market return.

As a comparison value a stock market index is usually taken ( for example, the DAX ), or a well-known investment funds.

A positive alpha does not necessarily mean that the value of a fund has outperformed its benchmark. Likewise, a negative alpha not necessarily mean that the value has underperformed its benchmark.

Although this is often the case, but it is sufficient counter-examples. For example, return differences to the benchmark can be generated for arbitrary.

Example

A stock in period t has a return of 13% dropped. However, the forecast based on the CAPM (Capital Asset Pricing Model) was 12%. The Alpha is therefore 1%. It represents the deviation of predicted and empirical yield

Market Model

The fundamental equation of the market model and the CAPM is:

The market, however, different yields are realized by this model. This deviation is measured by Jensen's alpha:

In words, this equation is:

Importance

The Jensen - alpha has a special significance in determining the performance of securities.

In the context of actively managed funds, the fund manager tries to achieve a higher return than the benchmark. For this purpose it is essential to recognize through equity analysis, the shares with a (future) positive alpha factor.

In the context of stock option plans for senior executives, as part of a performance-based payment, the option conditions should be chosen so that the options may be exercised only with a positive alpha factor. This is to avoid that the beneficiaries solely profit from the options because the stock market as a whole has developed positively.