A portfolio manager is evaluating the performance of Fund X, which delivered an alpha of +2% over the last year. What does a positive alpha of +2% primarily indicate in the context of performance measurement?

Question: A portfolio manager is evaluating the performance of Fund X, which delivered an alpha of +2% over the last year. What does a positive alpha of +2% primarily indicate in the context of performance measurement?

Answer options:

• The fund outperformed its benchmark by 2% due to market beta.
• The fund achieved a 2% return above the risk-free rate. ✅ The fund generated 2% more return than predicted by its risk (beta).
• The fund's standard deviation was 2% lower than its benchmark.

Correct answer: The fund generated 2% more return than predicted by its risk (beta).

Explanation: Alpha represents the excess return of an investment compared to the return that would have been predicted by the Capital Asset Pricing Model (CAPM), given the investment's beta. A positive alpha suggests the manager added value beyond what was expected for the risk taken.