What does "alpha" measure in finance?

Alpha is a key concept in finance that measures the performance of an investment relative to a benchmark index or risk-adjusted return. More specifically, it represents the excess return that an investment generates beyond what would be predicted based on its exposure to systematic risk, typically represented by a market index.

When an investor has a positive alpha, it indicates that the investment has outperformed the benchmark after adjusting for risk, suggesting that the investment manager has added value through their investment decisions. Conversely, a negative alpha would suggest underperformance relative to the benchmark.

The other options presented do not accurately capture the concept of alpha. The total return of an investment refers to the overall gain or loss including price appreciation and dividends, which is broader than the specific measurement of alpha. Volatility in relation to a market pertains more to beta, which indicates how much a stock's price fluctuates in relation to market movements. As for overall market performance, that typically pertains to the return on an index or general market trends rather than an individual investment's performance against a benchmark.