Cannon Certified Trust And Fiduciary Advisor (CTFA) Practice Test

Alpha reflects the portion of a portfolio’s return that cannot be explained by its exposure to the market. In CAPM terms, it’s the intercept from the regression of excess returns on the market excess return, capturing the abnormal or unexpected return beyond what the market movement would predict given the portfolio’s beta. A positive alpha indicates outperformance relative to the risk-adjusted benchmark, while a negative alpha indicates underperformance. This makes alpha the best description of the “unexpected portion of the actual return.” The other ideas describe different concepts: the sensitivity to the market is beta, not alpha; the range around the expected return relates to volatility or dispersion (not alpha); and risk from dissimilar issues held refers to diversification or unsystematic risk (also not alpha).