Calculate Investor's Alpha

Understanding Investor's Alpha

Investor's alpha refers to the excess return an investment earns over a benchmark or expected return. It is a measure of how well an investment has performed relative to its expected outcome.

In the given scenario, the investor initially determined that the expected return on their investment was 15.5%. However, a year later, when the investor sold the investment, they actually earned a return of 20%. This difference between the expected return and the actual return is what we call the investor's alpha.