Jensen Alpha

Jensen Alpha is an index that compares the performance of investment managers by allowing for portfolio risk. The Jensen index uses the capital asset pricing model (CAPM) as its basis for determining whether or not a money manager outperformed a market index. The CAPM determines the required rate of return, and the Jensen index helps investors see if the calculation yielded expected results. The formula for the Jensen index is as follows: Portfolio Return-[Risk-free Return + (Market Return-Risk-free Return) *Beta Measurement]. A high Jensen index suggests a high level of return, given the level of risk (systemic or market) on the investment. A low Jensen index, such as negative number, indicates inferior performance when compared to the risk.

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