With all due respect @paststat - As you bash @dmuthuk for not knowing how to calculate alpha, your method isn't correct either.
https://twitter.com/paststat/status/1291833394624487425

cc @Prashanth_Krish (1/n)

Alpha is a measure of the return on an investment, compared with a suitable market benchmark or index. For instance if one's portfolio comprises of largecaps such as ITC and RIL, the benchmark to compare against would ideally be Nifty 50. (2/n)

But one cannot talk about alpha in isolation, without considering another useful statistical measure - beta.
Beta inherently measures how volatile a portfolio has been in comparison to the market as a whole. (3/n)

beta (β or beta coefficient) of an investment is a measure of the risk arising from exposure to general market movements, also known as systematic risk. It is calculated by dividing Covariance (Portfolio return, market index return) by Variance (market index return). (4/n)

The alpha thus calculated after incorporating beta (relative volatility of portfolio return vs market benchmark return) is called Jensen's alpha. The formula for which is:

Alpha = R(i) - (R(f) + B x (R(m) - R(f))) (5/n)

Where R(i) = realized return of the portfolio/investment

R(m) = realized return of the appropriate market index (Nifty 50 in this case)

R(f) = risk-free rate of return for the time period (interest rate on a standard 1 yr FD)

B = beta of the portfolio wrt chosen market index