<p>Alpha, in the realm of portfolio management, refers to the excess return generated by a strategy or investment, above a relevant <a href="/NewSite/encyclopedia/benchmark/" class="ency-link">benchmark</a>. It's a measure of active return, or the value added by a manager's skill.</p>

<h2>How It Works</h2>
<p>Alpha is calculated as the difference between the return of an investment and the return of a benchmark index. For example, if an investment returns 15% while the benchmark index returns 10%, the alpha would be 5%.</p>
<p>Alpha can be positive, negative, or zero. A positive alpha indicates outperformance, a negative alpha indicates underperformance, and a zero alpha indicates performance in line with the benchmark.</p>

<h2>Why It Matters</h2>
<p>Alpha is a crucial metric for investors and fund managers. It helps to evaluate the performance of a strategy or manager, after accounting for market movements. For instance, if the market returns 10% and a fund returns 15%, the fund has generated an alpha of 5%. This means that, after adjusting for market conditions, the fund manager has added 5% to the fund's performance through their active management.</p>
<p>However, it's important to note that alpha doesn't account for risk. A strategy might generate high alpha, but if it's accompanied by high risk, it might not be suitable for all investors. Therefore, alpha should be considered alongside other metrics, such as <a href="/NewSite/encyclopedia/beta/" class="ency-link">beta</a> and Sharpe ratio, for a comprehensive understanding of an investment's performance.</p>