Alpha and beta are ratios used by financial advisors and investment managers to calculate and analyse the returns of mutual funds.

Alpha is a measure of performance in finance. It is the return made on an investment and hence, gauges the performance of an investment in any asset class against a particular benchmark. The excess or extra return made on an investment as compared with the return made by the benchmark is considered the investment’s alpha.

Alpha is used to indicate under performance or outperformance of a fund. A positive alpha means that fund has outperformed its benchmark index. Correspondingly, a negative alpha would indicate underperformance of the fund.

Please note, it is possible for two funds with same returns to have different alphas because return as well as risk contribute to a fund’s alpha.

In contrast, beta is the measure of volatility or risk in finance. It helps an investor understand how much risk he/she Is willing to take to achieve the stated return. Beta is also the measure of volatility.

The baseline number for beta, in contrast with alpha, is one. A beta of one is an indication that the security's price moves exactly as the market moves. So, if you have a mutual fund with 1.5 beta, then it is more volatile than a mutual fund which has 1 beta. Higher the number, higher the risk.

Alpha and beta are two of the five standard technical risk calculations, with the other three being:

- Standard deviation

- R-squared

- Sharpe ratio