What is alpha risk?

Alpha risk is a term used in finance to describe the risk associated with an investment's potential for underperformance or loss compared to a benchmark or market index. In other words, it refers to the risk that an investment may not achieve the expected return or may even result in a negative return. This risk is often attributed to factors such as poor investment decisions, market volatility, or unforeseen events that impact the performance of the investment. Investors and portfolio managers use alpha risk as a measure of the potential downside of an investment, and it is often considered alongside other measures of risk, such as beta, standard deviation, and volatility. Understanding and assessing alpha risk is important for investors to make informed decisions about their investment strategies and to manage their overall portfolio risk. Alpha risk can be mitigated through diversification, thorough research and analysis, and a disciplined investment approach. Additionally, hedging strategies, such as options and futures contracts, can be used to manage and reduce alpha risk in a portfolio. Overall, alpha risk is an important consideration for investors and is a key component of overall risk management in the financial markets.