Our goal is to offer higher than market average returns at acceptable risk. Alpha and beta are tools to describe how we generate returns and our exposure to market risk.
Alpha and beta are essentially statistical concepts, see the diagram at left for our net returns plotted against the S&P 500. The red line is a simple linear regression, giving the best fit through the data.
Alpha is a measure of returns independent of the movements of the overall market. In the example chart, alpha is the y-intercept. This chart doesn't prove that alpha is greater than zero, because there is uncertainty on where to plot the line through the data. We only intend to illustrate the idea.
Beta measures how the value of our portfolio changes with the overall market. A beta greater than 1 implies our portfolio will tend to appreciate more than the S&P 500 if the overall market goes up, and conversely it tends to decline more when the market falls. A beta less than 1 implies its response is more muted: it moves less than the index. In the example chart, beta is the slope of the line.