 In this section, I will explain the concept of alpha and how alpha is linked up with the concept of security market line. So when we talk about alpha, it basically tells us about the rate of return or the active return on an investment and it is used as a measure of performance of a fund as compared to any benchmark market index. So if you have to assess whether a fund is underperforming, overperforming or its overall performance, then we consider the value of alpha and then compare it with a market index which we benchmark to explain or represent the overall market movement. So this is linked up with the concept of security market line. When we say security market line, so it should not be mixed up with the concept of capital market line. So we discussed in the last section that we have a capital allocation line which explains different combinations of investment. So what are the combinations of investment that are possible for an investor, a given amount of money, different portfolio, risk free assets, risky assets, so what combinations can be possible for a given amount of investment. We call capital allocation line as a line for all those combinations. From all those capital allocation lines, that line is called capital market line. Now capital market line is something which is different from security market line or security market line or capital market line though different concepts. So before I explain the concept of alpha and its link with security market line, it is important to understand the difference between capital market line and security market line. So capital market line tells you the rates of return of a specific portfolio. And in the security market line, we take the risk premium on the vertical axis and the risk on the horizontal axis. So in order to have a better understanding of the two concepts, it is important to understand that when we take capital market line, the risk is measured in the standard deviation of sigma. But when we count the risk on the horizontal axis in the security market line, then we are measuring beta. So beta is different from sigma. So there is this difference between capital market line and security market line. So to clarify this difference, I am going to show you the graphs. Firstly, we will talk about the functions or the equations. In the capital market line, as you can see that we are explaining the equation in terms of the expected return of that particular fund. And we have equated this with the return of risk-free asset. And then you know that this is our risk premium. So you are expecting the access return of the market overall, with risk-free return, divided by sigma, which we were talking about. And this is your sigma because it indicates the risk of this particular fund. So if we plot this particular equation by taking different values of sigma and expected return, then we will be able to come up with the capital market line. But you can see the equation of the security market line. This has a little difference. We have taken the equation of capital asset pricing model from CAPM. But as you can see that we do not have an intercept here. This means that our security market line will always pass through the origin. And beta is defining its slope. Beta is the risk indicator which represents the risk in the security market line. Whereas we use sigma for risk in the capital market line. And this is your access market return. This is the access return on the fund which you are talking about. So we have a vertical access on the security market line. We have to take the access return on the fund on the y-axis. But the capital market line, we have taken the expected return. So this is the difference. Another difference is that we have an intercept here. Here you can see the value of the slope. And here you are taking the function of sigma. But right over here, we do not have an intercept. And we have a slope which is assessing the risk. And along with that we have a multiplicative firm term which is giving us information about risk premium. Now, if we look at the diagram, we can see that on the left side, you can see the capital market line. And this is how we get the capital market line. But on the other hand, if we talk about the security market line, in the security market line, you are taking risk premium. You are not taking expected return. You are taking risk premium on the vertical axis. And you are taking beta values on the horizontal axis. And since it does not have an intercept term, you can see that our security market line is passing through our origin. Now, these are all combinations of the security market line where you have a certain specific systematic risk premium relationship. And now, as we have a fund here, we have represented, for example, J with all the funds or all combinations, allocation of investment funds, which are under the security market line, we are getting all these inefficient combinations. But if you get a combination on top of it, it means that the risk premium you are getting on the given interest, given risk, the risk premium you are getting on top of it, that is additional. So, this is a good thing. So, now I am going to explain the concept of alpha since you have clearly understood the concept of security market line. What does the security market line tell us? And how does the capital market line make a difference or is it different? Now, if we look at the value of alpha, alpha is basically used to assess or determine how much your realized return will vary from the required return, which we calculate on the basis of CAPM. Now, what I just showed you, the security market line equation, what we did is we introduced an alpha to calculate its value. Now, what is the difference between this and the other equation? Here, we have introduced the realized return. So, realized return minus, what we just talked about, if we take into account that particular thing and solve it for alpha, then alpha gives you your realized return minus your overall expected return multiplied by its risk plus the risk-free return. What will be the difference? It will give you the value of alpha. So, the fund managers try to assess the realized return minus the expected return multiplied by its risk. It always comes in positive. So, if it is zero or negative, then there are no special efforts to be seen in this. But if we have the value of alpha coming in positive, then that indicates that the alpha positive of the fund is performing better than the overall market or performing more than the market. Its performance is better than the overall average performance of the market. So, to explain this, I am going to show you a diagram in which this line is the SML security market line. Suppose we have a fund which we have named to explain the alpha fund and we have put that on this dot. And as you can see that the alpha fund is the value of its beta and the risk-free value which is better, then you can see it in the space above the SML. Here you can see the alpha which is above the SML. So, if the fund turns out to be higher than the SML or it is placed in the upper area of the SML. So that means that the alpha fund is outperforming and performing better than all the funds available in the market with its performance this particular fund has outperformed the market. So, when we look at the point alpha it represents the alpha fund and you can see it is showing that it is overperforming the overall market. So, whenever we need to assess diagrammatically it will be mired as the vertical distance between alpha and SML as you can see the difference between alpha and SML will help you calculate the value.