Alpha

Also seen as: Jensen's alpha, risk-adjusted outperformance

How is alpha calculated?

Alpha is a strategy's realised return minus the return its beta and the market's return imply it should have earned.

where: $R_p$ is the strategy's return over the period, $R_f$ is the risk-free rate over the same period, $R_m$ is the market's (or benchmark's) return, and $\beta$ is the strategy's beta measured against that market. The bracket is the expected return given the exposure taken; alpha is the residual. Every input is an estimate over a chosen window, so alpha inherits the sensitivity of all of them — most of all beta's.

How is alpha different from excess return?

Alpha subtracts a beta-scaled benchmark return; excess return subtracts the benchmark return itself. That difference matters whenever a strategy's market exposure is not one-for-one with its benchmark. Take a strategy with a beta of 1.5 in a year when the market returned +10% and the risk-free rate was 0%: its exposure alone implies +15%. If it returned +13%, its excess return is +3pp — it beat the benchmark — while its alpha is −2pp, because it beat the benchmark by less than its extra market exposure accounts for. Excess return asks "did it beat the benchmark?"; alpha asks "did it beat what its exposure explains?".

What counts as a good value?

Positive alpha over a period means the strategy's return exceeded what its market exposure explains for that period, on that benchmark, with beta estimated over that window — and every one of those qualifiers can flip the sign. Change the benchmark and alpha changes; measure beta over a different window and it changes again; a stretch long enough to look convincing can still be chance, since alpha carries all the estimation error of the inputs it is built from. Alpha describes a past window and is not a forecast of a future one. Fincanva does not tell you whether a strategy's figures are good enough to act on — see Is this financial advice?.

Does Fincanva show alpha?

No. Fincanva does not report alpha on the metrics page, in a strategy's list row, or anywhere else in the app today. The comparison-to-benchmark figures Fincanva does report are excess return (the plain difference in returns) and, for a strategy inside a Combined, tracking error and information ratio against its parent Combined. See What every number on the metrics page means for the metrics that do exist.

Backtests show what would have happened — not what will. Fincanva provides no financial advice — see Is this financial advice?.