what i know and read from the internet is that alpha is the return earned outperforming the market .but then some people say if some strategy did good this strategy did well due to market beta and not alpha according to the alpha is the return earned by strategy by being market neutral I don't understand can anyone explain what exactly is alpha is
Return of strategy = Beta* Return of market + Alpha
Alpha is excess return generated by strategy after adjusting for beta.
Example 1: (but then some people say if some strategy did good this strategy did well due to market beta and not alpha)
Market Return = 12%
Strategy Return = 14.4%
Beta = 1.2
=> Alpha = 0
Hence, strategy doesn't add any value after adjusting for risk. The strategy just takes extra risk over market and is compensated for that. **
Example 2: (alpha is the return earned by strategy after adjusting for beta)
Market Return = 12%
Strategy Return = 18.0%
Beta = 1.2
=> Alpha = 3.6%
Hence, strategy generates extra 3.6% over market return (after adjusting for beta).
If a strategy has a beta of zero, then all the return is attributed to alpha. This strategy can be called market/beta neutral
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