Jensen's Alpha Calculator
This calculator helps finance professionals and CFA candidates to evaluate the performance of a portfolio by calculating Jensen's Alpha. It measures the excess return on a portfolio above the expected return, according to the Capital Asset Pricing Model (CAPM).
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Data Source and Methodology
All calculations are based on the Capital Asset Pricing Model (CAPM) and extensively referenced from authoritative financial textbooks and peer-reviewed papers. Please refer to your local financial regulations for precise applications.
The Formula Explained
Jensen's Alpha Formula:
\( \alpha = R_p - [R_f + \beta \times (R_m - R_f)] \)
Glossary of Terms
- Portfolio Return (R_p): The return of the investment portfolio.
- Risk-Free Rate (R_f): The return of an investment with zero risk, typically government bonds.
- Market Return (R_m): The return of the market portfolio.
- Beta (β): A measure of the portfolio's volatility in relation to the market.
How It Works: A Step-by-Step Example
Suppose your portfolio has a return of 12%, the risk-free rate is 2%, the market return is 8%, and the portfolio's beta is 1.1. Using the formula, Jensen's Alpha is calculated as:
\( \alpha = 12 - [2 + 1.1 \times (8 - 2)] = 2.6\% \).
Frequently Asked Questions (FAQ)
What is Jensen's Alpha?
Jensen's Alpha is a measure of the excess return that a portfolio generates over its expected return, predicted by the CAPM.
Why is Jensen's Alpha important?
It helps investors understand how much value a manager adds to a portfolio with his investing skills.
How do I interpret a positive Jensen's Alpha?
A positive Jensen's Alpha indicates the portfolio has outperformed the market's expected return.