Jensen’s Alpha

The Jensen’s Alpha is the difference between actual returns of a fund and those that could have been earned on a benchmark portfolio with the same amount of market risk (e.g. the same Beta). Jensen’s Alpha measures the return earned by a portfolio above or below that demanded by the market for its risk class.

The measure was developed to try to determine how much active management can increase returns above those that are purely a reward for bearing market risk.

Where:
Rp = Annualised average portfolio return
rf = Risk free rate
b = Benchmark return
βp= Beta”

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