The Alpha of a Stock

This video discusses the alpha of a stock.

A stock's alpha is the difference between its return and the return predicted by the Security Market Line (the visual representation of the Capital Asset Pricing Model). The Security Market Line plots various securities according to their beta and their expected return; if the market portfolio is efficient, each stock will be located somewhere on the Security Market Line (and thus, every stock will have an alpha of zero).

If a stock is above the Security Market Line (to the left of the line), this means the stock has a positive alpha (its return is higher than the return predicted by the Capital Asset Pricing Model). If a stock is below the Security Market Line (to the right of the line), this means the stock has a negative alpha (its return is lower than the return predicted by the Capital Asset Pricing Model). When there are stocks with nonzero alphas, investors can improve upon the market portfolio by purchasing stocks with a positive alpha and selling stocks with a negative alpha.—
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