Alpha
Chapters in this video
- 0:00 Why raw returns lie about manager skill
- 0:43 Alpha Al vs Beta Bob: the scorecard problem
- 1:40 Jensen's alpha and the CAPM expected return
- 2:37 Why index funds target zero alpha by design
- 3:12 The 15% return that hides a negative alpha
- 4:37 Working the CAPM math with beta of 2.0
- 5:22 Rapid-fire exam recap
What this video covers
- What alpha measures: actual return minus the CAPM expected return, and why it is also called Jensen's alpha
- How to read positive, zero, and negative alpha as manager skill, neutral performance, or value destruction
- Why index funds are intentionally designed to produce an alpha of approximately zero
- The exam trap where a fund beats the raw market return but still posts negative alpha once beta is accounted for
- How to compute CAPM expected return using the risk-free rate, beta, and the market risk premium
- Why a higher raw return does not automatically mean positive alpha, and what to write on scratch paper first
- How to separate true active management skill from returns driven purely by taking on more systematic risk
Read the full lesson, free
This video's complete written lesson is free to read in the CertFuel app, no signup wall. When you're ready to drill the topic, the full Series 7 course adds adaptive practice questions and spaced-repetition flashcards.