The Alpha coefficient is a risk-adjusted measure of the "excess return” on an investment. It is a common measure of assessing a manager’s performance as it is the return in excess of a benchmark index or "risk-free" investment. The difference between the fair and actually expected rates of return on a stock is called the stock's alpha.

The alpha coefficient is a parameter in the Capital Asset Pricing Model. One can prove that in an efficient market, the expected value of the alpha coefficient equals the return of the risk-free asset.

Therefore the alpha coefficient can be used to determine whether an investment manager or firm has created economic value:

?_i < r_f: the manager or firm has destroyed value

?_i = r_f: the manager or firm has neither created nor destroyed value

?_i > r_f: the manager or firm has created value

The measure of the correlated volatility of an investment (or an investment manager's track record) relative to the entire market is called Beta. Note the "correlated" modifier: an investment can be twice as volatile as the total market, but if its correlation with the market is only 0.5, its beta to the market will be 1.

Investors can use both Alpha and Beta to judge a manager's performance. If the manager has had a high Alpha, but also a high Beta, investors might not find that acceptable, because of the chance they might have to withdraw their money when the investment is doing poorly.

These concepts not only apply to investment managers, but to any kind of investment.