Jensen's Alpha — Mutual Fund Term Explained

Risk-adjusted excess return using CAPM. Shows if the manager beat what you would expect given the market risk taken.

Jensen's Alpha measures risk-adjusted performance relative to CAPM's expected return. Positive Jensen's Alpha indicates the fund manager added value beyond the market risk premium.

Formula

Jensen's Alpha = Portfolio Return − [Risk-Free Rate + Beta × (Market Return − Risk-Free Rate)]

Related terms

• Alpha — The excess return a fund generates over its benchmark. Positive alpha means the manager added value beyond what the market delivered.
• Beta — A measure of a fund's sensitivity to market movements. Beta of 1 moves with the market; >1 means amplified moves; <1 means dampened moves.
• Sharpe Ratio — Return per unit of total risk taken. Higher is better. Shows how much excess return you earn for each unit of volatility.

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