What Is Alpha signal?

In quantitative finance and portfolio construction, an alpha signal refers to a metric or indicator used to identify investments that are likely to outperform the broader market. Alpha signals can be derived from a variety of sources, including fundamental analysis, technical analysis, and quantitative models. Portfolio construction is a specific type of :term:``trading strategy`.

Alpha signals are also known as trading signals.

The goal of using an alpha signal is to identify securities that are undervalued or overvalued compared to their peers, and to use that information to construct a portfolio that generates excess returns (i.e., alpha) relative to a benchmark index.

Examples of alpha signals include measures of company profitability, earnings growth, price momentum, and valuation ratios. A portfolio manager may use one or more alpha signals to construct a portfolio that is expected to outperform the benchmark index.

Some of the common alpha signals include

When alpha signals of different industry verticals are compared, it is called factor investing.

See also

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