Jensen’s Alpha

Given the portfolio’s or investment’s beta and the average market return, Jensen’s Alpha is a risk-adjusted performance metric representing the average return on a portfolio or investment above or below the capital asset pricing model (CAPM) predicted. Simply put, Alpha is the name given to this statistic.Example of it:Jensen’s Alpha=Rp-[Rf+Bp*(Rm-Rf)Where,Rp = Expected Portfolio ReturnRf = Risk-Free RateBp = Beta of the PortfolioRm = Expected Market ReturnA portfolio has realised a return of 15%. The approximate market index returned 12%. The fund’s beta versus the same index is 1.2, and the risk-free rate is 6%. Jensen’s Alpha = 15 – [ 6 + 1.2 * (12 – 6) ] = 1.8%

Why is it vital to know Jensen’s Alpha?

As a fundamental practice of analysing our investments, investment managers are responsible for showing their performance against a given benchmark. Jensen’s Alpha is one of the known measures utilised to measure the fund’s performance.26. Term: