Overview

Alpha measures how well an investment performs relative to an appropriate market index. When alpha = 1, it means that the return on investment during a specfic time period outperforms the overall market average by 1%. When alpha = -1, it indicates that the investment underperforms the market average. To calculate the alpha, we can use the capital assets pricing model (CAPM) formula which is shown as follows:

r = Rf + Beta (Rm - Rf) + Alpha

Where:

r = return on the portfolio

Rf = risk-free return

Beta = market risk (systematic risk) of the portfolio

Rm = market return

Share
Reviews Add a review
No reviews yet

More From Corporate Finance Institute®

Browse our top rated business templates. See All
Energy Industry Comps Template Energy Industry Comps Template
278
17
This energy industry comps template provides a guideline and example of what a comparables universe would look like for a…
Financial Institution Dividend Discount Model
870
19
The financial institution dividend discount model uses future dividends to find the implied share price. This model is based on…
Loan Payment Calculator
546
0
The loan payment calculator allows users to determine the principal and interest payment each month until the full balance of…
DDM - Excel Dividend Discount Model Template
680
55
The dividend discount model template allows investors to value a company base on future dividend payments. This is based on…
Non-directional trading strategy template Non-directional Trading Strategies Template
599
0
The non-directional trading strategies template allow users to determine the profit when buying options. This template focuses on non-directional strategies…
restructuring financial model template preview 1 Restructuring Financial Model Template
868
0
This restructuring financial model template is used to demonstrate the financial interactions behind the restructuring process. Adjust this model to…