Jensen's Alpha Calculator FAQ
What is Jensen's alpha?
Jensen's alpha, also called Jensen's measure, is a risk-adjusted performance metric. It compares the actual return of an investment or portfolio with the return that the CAPM would predict from its beta and the market return.
What is the Jensen's alpha formula?
The standard formula is α = r_i - [r_f + β(r_m - r_f)]. Here, r_i is the investment return, r_f is the risk-free rate, β measures market sensitivity, and r_m is the market benchmark return.
How do I interpret positive and negative alpha?
A positive alpha means the investment earned more than its CAPM-implied return, so it outperformed on a risk-adjusted basis. A negative alpha means the return fell short of the CAPM benchmark. An alpha near zero means performance was roughly in line with what CAPM would expect.
What is a good Jensen's alpha?
There is no universal cutoff. In general, higher positive alpha is better, but you should judge it in context: over what time period it was earned, whether it was consistent, and whether the benchmark and beta assumptions were reasonable. A short-term alpha can be noisy, while a persistent alpha is usually more meaningful.
What benchmark should I use for Jensen's alpha?
Use a market benchmark that matches the investment you are evaluating. For a broad U.S. equity portfolio, that might be a broad stock index; for a sector or regional strategy, it should be a more relevant benchmark. Jensen's alpha becomes less useful if the benchmark does not reflect the investment's real opportunity set.
How is Jensen's alpha different from CAPM?
CAPM gives the expected return for a given beta, market return, and risk-free rate. Jensen's alpha is the difference between that expected return and the actual return. In other words, CAPM gives the benchmark return, and Jensen's alpha measures the excess performance relative to that benchmark.
Can this Jensen's alpha calculator solve for beta or market return too?
Yes. This calculator is not limited to solving for alpha only. Select the radio button next to the variable you want to calculate, then enter the other four values. You can solve for α, r_i, r_f, β, or r_m.
What is an example of Jensen's alpha?
Suppose an investment returned 12%, the risk-free rate was 4%, beta was 1.2, and the market return was 10%. The CAPM-implied return is 4% + 1.2 x (10% - 4%) = 11.2%. Jensen's alpha is therefore 12% - 11.2% = 0.8%, which indicates modest outperformance.
