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Definition of Alpha

Alpha is a measure of relative performance given a certain level of risk. Portfolio managers who are adding alpha to their portfolios are adding additional return through their asset selection. (2) A measure of the projected change in a security’s price as a result of fundamental factors relating only to that company.

Applying "Alpha" to Securities Exams:

Portfolio managers whose funds realize the highest alpha are providing the highest returns for their investors when measured against similar funds with similar investment objectives and risk profiles.A stock’s or portfolio’s alpha is its projected independent rate of return or the difference between an investment’s expected (benchmark) return and its actual return. Portfolio managers whose portfolios have positive alphas are adding value through their asset selection. The outperformance as measured by alpha indicates the portfolio manager is adding additional return for each unit of risk taken on in the portfolio

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