What is Alpha, Beta, Sharpe Ratio – Made Simple

Introduction

You’ve seen terms like Alpha, Beta, and Sharpe Ratio on mutual fund fact sheets. But what do they really mean for your investments?

These aren't just fancy formulas — they tell you whether your fund is rewarding you for the risk you’re taking. Let’s break them down with relatable examples.

Alpha – The Outperformance Measure

Think of Alpha as extra marks a student scores above average. 🧮 If the benchmark returns 10% and your fund delivers 13%, the Alpha is +3%.

 ✅ Positive Alpha = The fund beat the market

Beta – The Volatility Gauge Beta shows how sensitive a fund is to market movements.

• Beta = 1 ➤ Moves with the market
• Beta > 1 ➤ More volatile than the market
• Beta < 1 ➤ Less volatile than the market

Beta – The Volatility Gauge 

 Beta shows how sensitive a fund is to market movements.

• Beta = 1 ➤ Moves with the market
• Beta > 1 ➤ More volatile than the market
• Beta < 1 ➤ Less volatile than the market

Sharpe Ratio – Risk-Adjusted Returns

Sharpe Ratio = (Return – Risk-Free Rate) ÷ Standard Deviation It shows how much return you’re getting for every unit of risk.

 ✅ Higher Sharpe Ratio = Better reward for risk 

 Real-Life Example: Raj vs Neha Raj picked a fund with high returns (14%) but low Sharpe (0.6).

Conclusion

Don’t just chase returns. Use Alpha to check performance, Beta for volatility, and Sharpe Ratio to measure if your fund is worth the risk.

Next time you see a fund fact sheet, check these three metrics. They might just save you from taking on risk without reward.

Summary Table: Risk-Return Metrics Simplified