Accredited Wealth Management Advisor (AWMA) Exam 2 Practice Test

Alpha captures the extra return a manager earns after accounting for the portfolio’s risk relative to the benchmark. In the CAPM framework, portfolio performance is described by its beta (how much it moves with the market) and an intercept term called alpha. Alpha represents the portion of return that isn’t explained by market movements, meaning it’s the value added (or lost) after adjusting for risk. If alpha is positive, the portfolio delivered more return than would be expected given its risk exposure to the market; if negative, it underperformed.

Think of it this way: beta tells you how much risk you’re taking relative to the market, while alpha tells you whether that risk translated into extra reward beyond what the market would predict. The Sharpe ratio, by contrast, compares excess return to total risk (relative to a risk-free rate), not to a benchmark after adjusting for market risk. R-squared shows how much of the portfolio’s movements align with the benchmark, not how much value was added.