Describe the difference between 'alpha' and 'beta' in portfolio management.

• A. Alpha is risk taken by the market; beta is the excess return.
• B. Alpha is risk-adjusted return; beta measures market risk exposure.
• C. Alpha is excess return beyond the benchmark; beta is systematic risk exposure to market.
• D. Alpha and beta are both measures of liquidity.

Answer: (C)

This is about separating portfolio performance into market-driven returns and manager-added returns. Beta gauges how much of the portfolio’s moves come from the overall market—the systematic risk exposure. Alpha captures the portion of return that cannot be explained by that market exposure; it’s the excess return above the benchmark after accounting for beta. For example, with a beta of 1.0, if the market rises 8% and the portfolio rises 11%, alpha is 3%. If the portfolio’s beta is 1.2 and the market rises 8%, the expected return from market is 9.6%; if actual is 11%, alpha is 1.4%. Thus alpha reflects value added beyond just following the market, while beta is about risk linkage to the market. Other statements either mix up these roles or describe unrelated concepts like liquidity, which doesn’t fit.