Jensen’s Alpha

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    What is Jensen’s AlphaWhat is Jensen's Alpha? Jensen's Alpha, or just "Alpha", is... More?

    Jensen’s Alpha, or just “Alpha”, is used to measure the risk-adjusted performance of a security or portfolio in relation to the expected marketWhat are value stocks? A value company is a company that app... More return (which is based on the capital asset pricing model (CAPM).

    The higher the alpha, the more a portfolioWhat is a trading portfolio? When an investor holds a gro... More has earned above the level predicted.

    The measure was first used by Michael Jensen in 1968 and was originally designed to evaluate fund managers, i.e. to gauge if it was possible for them to consistently outperform the markets. Jenson’s results, however, suggested that this is rarely the case.

    Jensen’s Alpha is also known as “Jensen’s Performance Index” and “Jensen’s Measure”.

    Why is Jensen’s Alpha useful to investors?

    Jensen’s Alpha is important to investors because they need to look not only at the total return of a security or portfolio but also at the amount of risk involved in achieving that return.

    Usually, investorsWhat are value stocks? A value company is a company that app... More will aim to achieve a high return with a minimum amount of risk. So if, for example, two portfolios yielded identical returns, but one involved lower risk, the one with lower risk would rationally be the more attractive option.

    Jensen’s Alpha can help determine if the average return generated is acceptable based on the amount of risk involved. If the return is higher than that predicted by the CAPM, the securityA security is a financial instrument, such as stocks and s... More or portfolio is said to have a positive alpha (or an abnormal return).

    InvestorsWhat are value stocks? A value company is a company that app... More are always looking for opportunities where a positive alpha is involved.

    The formula for Jensen’s Alpha

    Jensen’s Alpha is calculated using the following equation:

    Jensen's Alpha
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