It measures the relationship between a fund's excess return over T-bills and the excess return of the benchmark index. Morningstar calculates beta using the same regression equation as the one used for alpha, which regresses excess return for the fund against excess return for the index. This approach differs slightly from other methodologies that rely on a regression of raw returns. A positive alpha figure indicates the fund has performed better than its beta would predict. In contrast, a negative alpha indicates a fund has underperformed, given the expectations established by the fund's beta.
Some investors see alpha as a measurement of the value added or subtracted by a fund's manager.
There are limitations to alpha's ability to accurately depict a manager's added or subtracted value. In some cases, a negative alpha can result from the expenses that are present in the fund figures but are not present in the figures of the comparison index. Of course, the value of beta is dependent on another statistic, known as R-squared. The difference is called the fund's excess return. The exact mathematical definition of alpha that Morningstar uses is listed below.