Alpha measures skill-based outperformance: the return earned above what CAPM predicts given your beta. Positive alpha means you beat the risk-adjusted benchmark; negative alpha means you underperformed. Calculation example: Your portfolio returns 12%, risk-free rate is 2%, market returns 10%, your beta is 1.2. Expected return = 2% + 1.2×(10%−2%) = 11.6%. Your alpha = 12% − 11.6% = 0.4%—you outperformed by 40bp after adjusting for risk. Reality check: Most active managers have negative alpha after fees. Alpha is zero-sum (before costs)—every dollar of outperformance comes from someone's underperformance. Generating consistent alpha is extremely difficult; most 'alpha' is actually beta in disguise or luck.