Alpha is a measure of the active return on an investment. It is the performance of an investment against a market index or benchmark which is considered to represent the market's movement as a whole. The excess return of an investment relative to the return of a benchmark index is the investment's alpha. In the context of regression analysis, when the excess returns of a fund are regressed against the excess returns of a benchmark, the intercept of the regression line is known as Alpha. This is because the intercept represents the point where the expected excess return of the fund (when the excess return of the benchmark is zero) is equal to Alpha. Therefore, Alpha is the correct answer.

Choice B is incorrect. Beta, in the context of financial analysis, represents the sensitivity of a fund's returns to changes in market returns. It is not the intercept but rather the slope of the regression line.

Choice C is incorrect. The residual error refers to the difference between actual and predicted values in a regression analysis. It does not represent the intercept of a regression line.

Choice D is incorrect. The correlation coefficient measures how closely two variables move together; it does not represent an intercept term in a regression analysis.

Things to Remember

• Alpha is often used to measure the value that a portfolio manager adds or subtracts from a fund's return. A positive alpha of 1.0 means the fund has outperformed its benchmark index by 1%. Correspondingly, a similar negative alpha would indicate an underperformance of 1%.
• Alpha is a risk-adjusted measure. This means it takes the volatility (price risk) of a mutual fund and compares its risk-adjusted performance to a benchmark index. The excess return of the fund relative to the return of the benchmark index is a fund's alpha.
• Alpha is also a measure of the residual value. It represents the return of an investment when the market is at zero. In other words, alpha is the return on an investment that is not a result of