Portfolio Alpha indicates the difference between the portfolio’s expected return and the expected return of the entire market*. That is, a positive Alpha shows how much more the portfolio is expected to earn compared with the entire market.
Alpha is calculated using Jensen’s measure (see formula here) and is always considered in conjunction with Portfolio Beta. Investors generally aim to get a good portfolio performance (i.e., a positive Alpha) for the level of portfolio volatility indicated by Beta.
You can find the Portfolio Alpha value on your dashboard or the Diversiview analysis page, under the ‘Performance & Benchmark’ section. The table shows two values:
- The left value indicates the portfolio alpha of the current asset allocation.
- The right value indicates the portfolio alpha of the optimal asset allocation.
*For the purpose of Alpha calculations using Jensen’s method Diversiview uses Australian Government 10 Year Bond yield (most current value available here). The ALL ORDS (XAO) index is taken to represent the entire Australian market.
For more help, visit Diversiview’s YouTube channel and check out our explanatory videos.