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Why CAPM Alpha and Beta Have Different Benchmarks

Article Quant Q&A · Author: user20554
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Summary

The document explains why alpha and beta have different reference values in stock analysis under the Capital Asset Pricing Model. Alpha measures return beyond the amount implied by the model, so the market portfolio, used as the baseline, has zero alpha: it has no excess return relative to itself. Beta measures how a security’s returns move in relation to the market, so the market portfolio has a beta of one by definition.

The answer’s explanation is conceptual and rests on the CAPM framing. It distinguishes a return measure from a measure of market sensitivity, resolving why the two benchmarks are not the same. It does not derive the CAPM, discuss estimation methods, or address how alpha and beta may vary across samples or models. Its takeaway applies to the standard market-relative interpretation presented in the question.

Key ideas

  • In the CAPM framing, alpha represents return beyond the model’s expected return.
  • The market portfolio has zero alpha because it has no excess return relative to itself.
  • Beta measures a security’s sensitivity to market movements.
  • The market portfolio has a beta of one relative to itself.
  • Alpha and beta use different baselines because they describe different quantities.

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EquitiesFactor investingStatistics
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# Alpha & beta in investing


# Alpha & beta in investing












In stock analysis the baseline for alpha is 0, however for beta it's 1. Why is that so, if they are both comparisons to the market at a large?

## Answer by Kuma (score 3)

https://quant.stackexchange.com/a/34578

I believe that you are working with the CAPM there. Alpha is a measure of how much excess return e.g. a stock generates, while Beta is a measure of how volatile its price is relative to the market. So the "baseline" or market does obviously have a beta of one with an Alpha of zero (no excess return since you are looking at the market/"baseline" as you called it), according to the CAPM.

I hope this answers your question.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.