Alpha, Beta & Management Style — Q&A

Whether a fund’s return was higher or lower than expected. Alpha = actual return − expected return.

+3. The fund outperformed expectations by 3%.

Up 15% (10% × 1.5). Beta above 1.0 means more volatile than the market.

−2. Market return = 14% (from beta-1.0 BCD). Expected TUV return = 1.5 × 14% = 21%. Alpha = 19% − 21% = −2 (underperformed by 2%).

Alpha = (PR − RF) − [Beta × (MR − RF)], where PR = portfolio return, RF = risk-free return (commonly 3-month T-bill), MR = market return.

−4. Use Russell 2000 as MR (small-cap benchmark, not S&P 500). Alpha = (28%−2%) − [2.5×(14%−2%)] = 26% − 30% = −4.

Near 1.0 — same volatility as the benchmark.

Active managers aim to beat the benchmark, so alpha can be positive or negative. Passive funds designed to match benchmarks should have alpha near zero.

Down 20% (10% × −2.0). Negative beta moves opposite the market.