Definition
Alpha is a measure used to understand how well an investment has performed compared to the overall market or a benchmark index. It shows whether a fund or stock has performed better or worse than the market.
Example
For example, if a mutual fund gives a return of 12% in a year while its benchmark index gives a return of 10%, the fund has generated an alpha of +2%. This means the fund performed better than the market.
Caution
A positive alpha shows better performance than the benchmark, while a negative alpha means the investment performed worse. However, investors should also consider factors like risk, market conditions, and long-term performance before making investment decisions.