Features

• Alpha is a comparison between the volatility (price risk) of a mutual fund in relation to a benchmark index (a scoring system used to measure a fund's performance). Mutual fund investors use Alpha to analyze risk based on the mutual fund's current price.
  
  

CAPM

• The Capital Asset Pricing Model (CAPM) evaluates the overall risk and anticipated return of an investment. Alpha is one of the tools used to compute risk under this theory of investing.
  
  

MPT

• The Modern Portfolio Theory (MPT) is another investment theory that investors use to determine various levels of risk and reward. Alpha is one of five risk ratios used to calculate the overall amount of risk in a mutual fund.
  
  

1.0

• A reading above 1.0 indicates a mutual fund's ability to outperform the market. A reading under 1.0 indicates that a particular investment is underperforming in the market.
  
  

Considerations

• Alpha can be used to gauge the overall risk of investments including common stocks, Exchange-Traded Funds (ETFs) and index funds.