This video discusses the concept of alpha (ex ante alpha and ex post alpha). Please refer to the security market line for the basics. The following is a part of the transcript. This video requires Flash 8 or above. If it does not start, click the play button to start.

Alpha is used to measure difference between the expected return and required return of a stock. Therefore, it also represents the abnormal return an investor can obtain.

Alpha = expected return – required return

In economics, “ex post” means “after the fact”. So it is calculated after the event has happened. So,

ex post alpha = historical return of a stock – historical return of similar stocks

And “ex ante” means “beforehand”. So it is calculated before the event has happened. So,

ex ante alpha = expected return – required return

However, there is always pitfall in the CFA exam you have to watch out, i.e. how to calculate the expected return. This is shown in the video.