Alpha

What this video covers

• What Jensen's alpha actually measures: excess return relative to the Capital Asset Pricing Model (CAPM) expected return for that specific risk level, not excess return versus the market
• Why beta and alpha work as a pair: beta quantifies systematic risk taken, while alpha judges whether the actual return justified taking that risk
• How to calculate alpha in two strict steps: first compute the CAPM expected return using the risk-free rate, beta, and market return, then subtract that expectation from the actual return
• Why positive alpha signals genuine manager skill, zero alpha is the target for index funds by design, and negative alpha means value was destroyed
• The exam trap embedded in high raw returns: a portfolio with beta 2.0 that returns 15% when the market returns 10% still posts negative alpha of -2% because CAPM expected 17%
• How to spot question stems that tempt you with market-beating returns and train yourself to always ask what risk level produced them