Alpha

The return earned above what the asset's exposure to risk factors would predict. It is the measure of a manager's added value.

Where you will meet it

Alpha comes up in 33 learning outcome notes across the FRM syllabus. A few of them:

Commodity Forwards and Futures
FRM Part I · Financial markets and products
“This μ is not the alpha of a regression.”
Modern Portfolio Theory (MPT) and the Capital Asset Pricing Model (CAPM)
FRM Part I · Foundations of risk management
“One above it has a positive alpha and looks underpriced, and one below looks overpriced.”
Operational Risk
FRM Part I · Valuation and risk models
“So α is minus the slope, and it can be estimated by regression or from two points: Alpha = ln(p1 ÷ p2) ÷ ln(x2 ÷ x1).”
Margin (Collateral) and Settlement
FRM Part II · Credit risk measurement and management
“Here RC is replacement cost, PFE is potential future exposure, and alpha is 1.4.”

All terms beginning with A · FRM glossary

Practise alpha until it is automatic: questions that explain every wrong option.

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