when you want to determine excess returns on investment use the alpha ratio which refers to returns earned on investment above the benchmark return in other words it measures excess returns from the benchmark index 
according to investopedia alpha often considered the active return on an investment gauges the performance of an investment against a market index or benchmark that is considered to represent the market s movement as a whole to calculate alpha in a simple way subtract the total return of an investment from a comparable benchmark in its asset category to take into account asset investments that are not completely similar calculate alpha using jensen s alpha which uses the capital asset pricing model capm as the benchmark here s an example of alpha a beta calculation shows how correlated the stock is vs a benchmark that determines the overall market usually the standard poor s 500 index or s p 500 the s p 500 is a market capitalization weighted index of 500 leading publicly traded companies in the united states to calculate beta divide the variance which is the measure of how the market moves relative to its mean by the co variance which is the measure of a stock s return relative to that of the market here s an example of beta beta gives investors additional insight when they do further analysis and ask is there a reason why a particular stock is underperforming or outperforming beta can help answer that question when evaluating relative performance overall because it might help shed light on the reason why the stock outperforms or underperforms during certain times a sharpe ratio is helpful to determine whether the risk is worth the reward it is used when comparing peers or etfs that hold similar assets the calculation for the sharpe ratio is the adjusted return divided by the level of risk or its standard deviation according to investopedia the sharpe ratio s numerator is the difference over time between realized or expected returns and a benchmark such as the risk free rate of return or the performance of a particular investment category generally when comparing similar portfolios the higher the sharpe ratio the better because it shows an attractive risk adjusted return meaning the return after taking into account the degree of risk that was taken to achieve it 