Alpha represents the portion of a fund’s return that is generated solely by the skills of the portfolio manager.  The Alpha (or Intercept) is the value on the Y axis when the X axis is zero.  When measuring two investments, usually a fund against an index, Alpha represents the theoretical return of the first investment when the second investment has a zero return.  This means it represents the over or under performance of a fund in relation to its benchmark.  For example, an alpha of 0.5 implies that fund return is 0.5% when index return is 0.  Conversely, if alpha is -1, fund return would be –1% when the index return is 0. In order to calculate the alpha of a fund against a benchmark, a regression analysis is performed using the monthly returns of the individual funds.  The Regression Line on the scatter diagram cuts the Y axis at the value of the alpha stated in the data box.  It should be noted that a positive alpha is invariably a positive indicator; the larger the value the better the performance ratio of a given fund.

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