What does alpha represent in investment management?

Alpha is a key concept in investment management that represents the performance of an investment relative to a benchmark index, typically after adjusting for risk. It essentially indicates whether an investment has outperformed or underperformed the market, allowing investors to assess the effectiveness of their investment strategies.

When an investment has a positive alpha, it signifies that it has earned a higher return than what was predicted by its risk profile in comparison to the benchmark. Conversely, a negative alpha indicates underperformance. This measure is crucial for investors seeking to determine the value added by a fund manager's skill or strategy beyond simply tracking the market.

In the context of the other options, the risk factor of an investment refers to the volatility or uncertainty associated with the investment, which is distinct from its performance relative to a benchmark. The expected market return relates to the average return anticipated from the market itself rather than a specific investment's performance. Meanwhile, total dividends paid are an income measure that doesn’t directly reflect overall investment performance or risk-adjusted returns.