Alpha, Definition

A measure of a mutual fund's risk relative to the overall market. It reflects the difference between a mutual fund's actual performance and the performance expected based on risk level taken by the fund's manager. A fund that produced the expected return for the level of risk assumed has an Alpha of zero. A positive Alpha shows that the manager produced a return greater than expected for the risk taken. A negative Alpha indicates that the manager has produced a return smaller than expected relative to the risk taken. The formula for alpha is the following:

[ (sum of y) - ((b)(sum of x)) ] / n

Where:
n = number of observations (36 mos.)
b = beta of the fund
x = rate of return for the market
y = rate of return for the fund