What does Alpha measure in investment performance?

Alpha measures the incremental return that an investment generates relative to a benchmark, adjusted for the level of risk taken. It represents the value added by a portfolio manager's investment decisions compared to a standard benchmark, which could be a market index or another relevant comparator.

When discussing investment performance, alpha is particularly significant as it highlights the effectiveness of active management by showing how much excess return has been produced over and above the returns predicted by beta, which measures market risk. A positive alpha indicates that the investment has performed better than expected, given its level of risk, while a negative alpha suggests underperformance.

The other options focus on different aspects of investment performance. For example, income generated by an investment refers to cash inflows such as dividends or interest, which does not encapsulate the full concept of alpha. The cost of investment relative to market price pertains to transaction costs and pricing, which is not a measure of performance. Lastly, gross return before fees and expenses evaluates raw profit but does not consider the adjustments for risk or compare it to a benchmark, which is fundamental to understanding alpha.