What does 'alpha' signify in finance?

In finance, 'alpha' signifies a measure of an investment's performance against a benchmark, typically a market index. It represents the excess return that an investment generates over the expected return based on its risk level as compared to that benchmark. Investors and fund managers use alpha to gauge how well an asset or portfolio is performing relative to the market. A positive alpha indicates that the investment has outperformed its benchmark, while a negative alpha suggests underperformance.

This concept is particularly important in the context of active investing, where investors aim to achieve returns greater than those provided by passive market strategies. Understanding alpha helps investors assess the effectiveness of their investment strategies and make informed decisions about where to allocate their resources.