Alpha

In finance, the term “alpha” refers to the margin by which an investment fund outperforms benchmark rates. The higher and more consistent a fund’s alpha, the more profitable the fund is for investors.

Example: An investment fund which is actively managed aims to beat a benchmark index which has a growth rate of 3% per annum. If the fund achieves a growth rate of 5%, its alpha would be 2% (5% fund growth – 3% benchmark growth). In this case, the actively-managed fund would perform 2% better than a passively-managed fund (an ETF, for example) which simply tracks the benchmark index.

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