Best fit alpha is the measure of the difference between a fund’s actual returns and its expected performance, determined by its corresponding Best Fit Index and level of risk as measured by beta.
Best Fit Alpha
What is best fit alpha?
- Best fit alpha is the measure of the difference between a fund’s actual returns and its expected performance.
- Alpha is often referred to as the “excess return” and is commonly used to measure a fund’s ability to beat the market.
- Beta is a measure of a fund’s sensitivity to market movements.
Alpha is often referred to as the “excess return” and is commonly used to measure a mutual fund’s ability to beat the market.
Best fit alpha is the alpha of the fund relative to its Best Fit Index, which is the market index that shows the highest correlation with a fund over the most-recent 36 months.
A positive alpha figure indicates the fund has performed better than its beta (sensitivity to market movements) would predict. In contrast, a negative alpha indicates the fund has underperformed according to the expectations established by its beta.
See also Alpha, Best Fit Index.