What does alpha measure in portfolio performance?

• A. The risk-adjusted excess return relative to a benchmark.
• B. The total raw return without risk adjustment.
• C. Only downside risk.
• D. Correlation with the benchmark.

Answer: (A)

Alpha measures how much a portfolio adds beyond what would be expected from its market risk. It is the risk-adjusted excess return relative to a benchmark. After accounting for the portfolio’s exposure to the market (its beta), alpha is the portion of performance that cannot be explained by market movements alone. If alpha is positive, the manager has added value beyond the market risk taken; if negative, the portfolio underperformed given its risk. For example, with a CAPM framework, Rp ≈ Rf + beta*(Rm − Rf) + alpha, so alpha captures the extra return beyond this risk-adjusted expectation. This is why the correct description is risk-adjusted excess return relative to a benchmark. The other options describe raw return, downside risk, or correlation, none of which isolate the active, risk-adjusted performance expressed by alpha.