Quick Definition

Jensen's Measure, also known as Jensen's Alpha, is a performance metric that evaluates the excess return of an investment portfolio over the predicted return by the Capital Asset Pricing Model (CAPM).

Formula

Examples

• 1A mutual fund manager whose portfolio returns 15% in a year when the expected CAPM return was only 10% demonstrates a positive Jensen's Alpha of 5%.
• 2An investment portfolio that underperforms the CAPM prediction by 3% in a year has a negative Jensen's Alpha of -3%.
• 3A portfolio manager consistently achieving a positive Jensen's Alpha over several years is often considered skilled, as they are adding value beyond the market's average.

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