Question 1

What is Jensen's Alpha and what does it measure?

Accepted Answer

Jensen's Alpha (α) is a risk-adjusted performance measure that calculates how much excess return an investment manager delivered beyond what would be expected given the portfolio's systematic risk (Beta) under the Capital Asset Pricing Model (CAPM).

Question 2

How does the CAPM expected return formula work in Jensen's Alpha?

Accepted Answer

CAPM calculates expected return as: E(R) = R_f + β × (R_m - R_f). If the market earns 10% and the risk-free rate is 4%, a fund with β = 1.5 is expected to earn 4% + 1.5 × (10% - 4%) = 13.0%. Any return above 13.0% represents positive Jensen's Alpha.

Question 3

Positive Alpha vs. High Beta: Why is outperformance not always skill?

Accepted Answer

A fund that earns 16% in a 10% bull market might seem impressive, but if its Beta is 2.2, CAPM predicted it should have earned 17.2%. The manager took extreme leverage risk and actually produced negative Alpha (α = -1.2%), destroying risk-adjusted value.

Question 4

Can you provide a step-by-step worked numerical example of Jensen's Alpha?

Accepted Answer

Assume a growth fund achieves a 15.0% return (R_p = 15.0%). The S&P 500 returned 11.0% (R_m = 11.0%), the risk-free 10-Yr Treasury yield is 4.0% (R_f = 4.0%), and the fund's measured Beta is 1.20 (β = 1.20). Step 1: Market Risk Premium = 11.0% - 4.0% = 7.0%. Step 2: CAPM Expected Return = 4.0% + (1.20 × 7.0%) = 4.0% + 8.4% = 12.4%. Step 3: Jensen's Alpha α = 15.0% - 12.4% = +2.60% (positive stock-picking skill).

Question 5

What are the common limitations of Jensen's Alpha in non-linear portfolios?

Accepted Answer

Jensen's Alpha assumes beta risk is constant and asset returns follow a normal distribution. It is less reliable for option strategies, hedge funds with dynamic leverage, or portfolios with asymmetric tail risks.

Question 6

Is my portfolio data and risk metrics calculation private?

Accepted Answer

Yes. All portfolio returns, risk-free yields, and beta estimates are processed exclusively in client-side browser memory with zero network uploads.

Question 7

What constitutes a statistically significant positive Jensen's Alpha in finance?

Accepted Answer

Consistently delivering an annualized Jensen's Alpha of +1.5% to +3.0% over a full 5-year market cycle after all fees places a fund manager in the top 5% of global institutional investors.

Market Environment	Market Return (Rm)	CAPM Expected	Alpha Spread
Severe Bear Market (-20%)	-20.0%	-24.8%	+39.8%
Flat Market (0%)	0.0%	-0.8%	+15.8%
Average Market (+10%)	10.0%	11.2%	+3.8%
Current Input Baseline	11.0%	12.4%	+2.6%
Strong Bull Run (+25%)	25.0%	29.2%	-14.2%

Market Environment	Market Return (Rm)	CAPM Expected	Alpha Spread
Severe Bear Market (-20%)	-20.0%	-24.8%	+39.8%
Flat Market (0%)	0.0%	-0.8%	+15.8%
Average Market (+10%)	10.0%	11.2%	+3.8%
Current Input Baseline	11.0%	12.4%	+2.6%
Strong Bull Run (+25%)	25.0%	29.2%	-14.2%

Jensen's Alpha Calculator

CAPM & Alpha Inputs

+2.6%excess alpha

CAPM Expected Return

Annual Dollar Alpha

Market Risk Premium

Market Environment Sensitivity Matrix