Stock Market Basics : Alpha Generation

Alpha Generation refers to how much returns securities have generated vis-a-vis it's Benchmark. Any returns above its benchmark can be attributed as Alpha.

Any security can be an alpha generator, including government bonds, foreign stocks or derivatives like stock options and futures.

Coming to Stock Market parlance, let's illustrate with below example :?

Here Nifty 100 index gave returns of 5% in 6 months and one of the share of the same index Eicher Motors gave 34% returns in same period. Hence?we can claim Alpha Generation of 29%; difference between Actual Returns of Eicher Motors & Benchmark Nifty 100 Index.

Now let us take example of another company from same Index to illustrate what is not Alpha generation :

As we can see share price of Avenue Supermarts, famously known as Dmart was flat and gave no returns in 6 months. Since it underperformed the index there is no Alpha generated.

While we gave example specific to an individual stock, one needs to derive Alpha on a portfolio level with its correct benchmark. Goal of every investor is to achieve Alpha on their portfolio level.