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Jensen's alpha is a statistic that is commonly used in empirical finance to assess the marginal return associated with unit exposure to a given strategy. Generalizing the above definition to the multifactor setting, Jensen's alpha is a measure of the marginal return associated with an additional strategy that is not explained by existing factors.
He developed a method of measuring fund manager performance, the so-called Jensen's alpha. [10] Based upon his 1968 University of Chicago Ph.D. dissertation, Jensen posited that fund manager abnormal performance should be based upon a fund's average return relative to how much risk it exposed investors to, and how other risky assets had done.
Alpha is a measure of the active return on an investment, the performance of that investment compared with a suitable market index.An alpha of 1% means the investment's return on investment over a selected period of time was 1% better than the market during that same period; a negative alpha means the investment underperformed the market.
A positive Jensen's alpha indicates that managers of the fund have been able to extract higher returns than the market. Skip to main content. Sign in. Mail. 24/7 Help. For premium support please ...
Also known as the Jensen's Performance Index, it measures the return of an investment compared to its expected risk-adjusted return. 3 Funds With High Alpha for Above Average Returns Skip to main ...
Over shorter time periods, such as one year, Jensen's alpha is a useful performance metric, adjusting returns for market beta risk. For instance, a low-volatility strategy with a beta of 0.7 in a 10% rising market would be expected to return 7%. If the actual return is 10%, Jensen's alpha is 3%.
The information ratio is often annualized. While it is then common for the numerator to be calculated as the arithmetic difference between the annualized portfolio return and the annualized benchmark return, this is an approximation because the annualization of an arithmetic difference between terms is not the arithmetic difference of the annualized terms. [6]
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