# Alpha and Beta > Beta measures how much a portfolio moves with the market; alpha is the return beyond what that exposure explains. Learn formulas, CAPM, regression and pitfalls. Source: https://learn.tradelabsai.com/portfolio/alpha-and-beta/ Track: Portfolio and Performance · Level: Intermediate · Updated: 2026-10-03 Publisher: TradeLabs AI (https://tradelabsai.com). Education, not financial advice. Cite as: TradeLabs Learn, "Alpha and Beta", https://learn.tradelabsai.com/portfolio/alpha-and-beta/ Beta and alpha split a portfolio's returns into two parts: the part explained by market movements and the part that is not. Beta measures sensitivity to the market: a beta of 1.5 means the portfolio tends to move 1.5% when the market moves 1%. Alpha is the return left over after accounting for that market exposure, often treated as a sign of skill. A fund that beats the market simply by holding riskier stocks has high beta, not high alpha. Separating the two is essential for judging whether a manager or strategy truly adds value. ## Beta ``` Beta = Covariance(portfolio returns, market returns) / Variance(market returns) ``` Equivalently, beta equals the correlation between the portfolio and the market, multiplied by the portfolio's volatility divided by the market's volatility. See [Covariance and Correlation](https://learn.tradelabsai.com/math/covariance-and-correlation/). | Beta | Meaning | |---|---| | Above 1 | Moves more than the market (such as many technology stocks) | | 1 | Moves with the market (an index fund) | | Between 0 and 1 | Moves less than the market (such as utilities) | | Around 0 | Little relation to the market (market neutral strategies) | | Below 0 | Tends to move opposite to the market | ## Alpha and CAPM The Capital Asset Pricing Model (CAPM) says the expected return for a given beta is: ``` Expected return = Risk free rate + Beta × (Market return - Risk free rate) Alpha = Actual return - Expected return ``` This version is often called Jensen's alpha, after Michael Jensen, who used it in 1968 to evaluate mutual funds. **Example: Is it alpha or beta?** A portfolio returned 13% last year. The market returned 10% and the risk free rate was 4%. The portfolio's beta is 1.2. CAPM's expected return is 4% plus 1.2 times (10% minus 4%), which is 4% plus 7.2%, or 11.2%. Alpha is 13% minus 11.2%, or 1.8%. The portfolio beat the market by 3 percentage points, but 1.2 points of that came from extra market exposure; only 1.8 points might reflect skill. Over one year, even that could easily be luck. Estimate beta for real data with the [Correlation and Beta Calculator](https://learn.tradelabsai.com/tools/correlation-and-beta-calculator/). ## Estimating with regression In practice, alpha and beta are estimated by regressing the portfolio's excess returns on the market's excess returns: ``` Portfolio excess return = Alpha + Beta × Market excess return + Error ``` The slope is beta, the intercept is alpha (per period, so annualise it), and R squared shows how much of the portfolio's movement the market explains. See [Regression Analysis](https://learn.tradelabsai.com/math/regression-analysis/) and [R-Squared](https://learn.tradelabsai.com/portfolio/r-squared/). ## Multi factor alpha CAPM uses only the market. Many returns that look like alpha are actually exposure to other known factors, such as small companies, cheap value stocks or momentum. Multi factor models, such as the Fama French models, estimate alpha after controlling for these factors. A manager whose alpha disappears after adding factors is delivering factor beta, which can often be bought cheaply in funds. See [Factor Models](https://learn.tradelabsai.com/portfolio/factor-models/) and [Factor Investing Explained](https://learn.tradelabsai.com/research/factor-investing-explained/). ## Pitfalls | Pitfall | Explanation | |---|---| | Wrong benchmark | A small cap fund compared with a large cap index shows misleading alpha | | Short records | Alpha estimates have large errors over a few years. See [Statistical Significance in Trading](https://learn.tradelabsai.com/math/statistical-significance/) | | Unstable beta | Beta changes over time and in crises, when correlations rise | | Non linear exposures | Option strategies have betas that change with the market | | Fees | Alpha before fees can turn negative after fees | ## Why it matters for traders - **Hedging:** knowing beta tells you how many index futures to sell to hedge market risk. See [Hedging](https://learn.tradelabsai.com/markets/hedging/). - **Evaluating strategies:** a strategy that only earns money when the market rises may simply be long beta. - **Portfolio construction:** combining low beta, high alpha strategies improves diversification. See [Diversification](https://learn.tradelabsai.com/portfolio/diversification/). ## Frequently asked questions ### What is beta in investing? A measure of how much a portfolio or stock tends to move relative to the market; a beta of 1.5 means it moves about 1.5 times as much. ### What is alpha in investing? The return beyond what is explained by market exposure, or by several risk factors in multi factor models. ### Can alpha be negative? Yes. Negative alpha means a portfolio earned less than expected for its risk, which is common after fees. Next, learn how consistently a manager beats a benchmark in [Information Ratio and Tracking Error](https://learn.tradelabsai.com/portfolio/information-ratio/). ## Continue learning - Next lesson: [Information Ratio and Tracking Error](https://learn.tradelabsai.com/portfolio/information-ratio/) - Previous lesson: [Ulcer Index](https://learn.tradelabsai.com/portfolio/ulcer-index/) - Related: [Ulcer Index](https://learn.tradelabsai.com/portfolio/ulcer-index/): The Ulcer Index measures downside risk by combining how deep and how long drawdowns last. Learn the formula, a worked example, the Martin ratio and how to use it. - Related: [What Is Alpha?](https://learn.tradelabsai.com/research/what-is-alpha/): Alpha is return beyond what market and factor exposure explain. Learn how alpha is measured, the difference between alpha and beta, and why true alpha is rare. - Related: [Correlation and Beta Calculator](https://learn.tradelabsai.com/tools/correlation-and-beta-calculator/): Free correlation and beta calculator. Paste two lists of returns to get correlation, beta, alpha per period and R squared for a stock, fund or strategy. - Related: [Information Ratio and Tracking Error](https://learn.tradelabsai.com/portfolio/information-ratio/): The information ratio divides active return by tracking error to measure how consistently a portfolio beats its benchmark. Learn the formulas, values and uses. - Related: [Treynor Ratio](https://learn.tradelabsai.com/portfolio/treynor-ratio/): The Treynor ratio divides excess return by beta to measure reward for market risk. Learn the formula, a worked comparison and how it differs from the Sharpe ratio. - Related: [Factor Models](https://learn.tradelabsai.com/portfolio/factor-models/): Factor models explain asset returns with common drivers such as the market, size, value and momentum. Learn CAPM, Fama French and how to run a factor regression.