The formula for calculating Alpha is Alpha = Actual Return - Expected Return OR Benchmark 🧮
But, since we’re subtracting things, Alpha might not always be positive. . . 🫢
In fact, Alpha can be positive, negative, or even zero! 🤯
Let’s explore what each of these could mean ✏️
A positive Alpha means that the actual return was greater than the expected or benchmark 🗯️
This means the stock has greater returns 🥳
Many investors will describe a stock with positive Alpha, as something that has “outperformed” 💪 since it’s doing better than the benchmark or expected!
On the flip side. . . 😥
Negative Alpha = a stock has done worse than expected ❤️🩹
This means the stock as “underperformed” 😭
Lastly, a zero Alpha is the strangest case and is rare! 👀
Zero Alpha means that there was no difference between the Actual Return and the Expected/Benchmark Return 😮
So, A zero alpha stock has exactly matched expectations. 🤝
For a quick recap 🥁
Positive = Overperformed. Zero = Matched expectations. Negative = Underperformed.
So, now you know the different signs of Alpha and what they mean 🥳
