What is Alpha Coefficient?

In a traditional financial context, alpha is a measure of the active return on an investment compared to a market index. For example, an alpha of 10% signifies that an investment's return over a specific time frame performed 10% better than the average market return during the same period, while a negative alpha denotes that the investment underperformed the market. In contrast, beta measures the volatility of an investment and is an indication of its relative risk. Alpha and beta are two key coefficients that make up the capital pricing model that is utilized in modern portfolio theory.