FRM Financial Risk Manager Practice Test

The higher the ‘alpha,’ the better the manager. Alpha represents the fund's return when the benchmark's return is 0. This shows the fund's performance relative to the benchmark and can show how the fund manager performs.

Key Takeaway: Alpha is a parameter in the CAPM. The expected value of the alpha equals the return of the risk free asset. If alpha is smaller than the risk free rate, the investment is too risky for the return. If alpha equals the risk free rate, the investment has earned a return adequate for the risk taken. If alpha is higher than the risk free rate, the investment has higher reward for the assumed risk.