In this section, we will explore various financial concepts. For an in-depth survey of the domain knowledge, you are encouraged to refer to the syllabus of the Chartered Finance Analyst (CFA).
Alpha and beta returns in the capital asset pricing model
According to the capital asset pricing model (CAPM), investment return equals the risk-free rate + alpha + beta * market return + noise (with a mean of zero). Alpha is the return earned by the superior performance of the firm or investors, while beta is the riskiness of the asset in comparison to the overall market return. Beta is high when the risk of the investment is riskier than the average market. Noise is the random movement or luck that has a long-term return of zero.
The asset management industry, especially professional investment managers, is commonly charging clients based on alpha. That explains why people pay so much attention to alpha.
