Jensen's Alpha
Definition
The excess return of a portfolio over its CAPM-predicted return, measuring the manager's ability to generate returns above what the portfolio's risk level warrants.
Explanation
Jensen's Alpha, introduced by Michael Jensen in 1968, is calculated by comparing actual portfolio returns to the return predicted by CAPM given the portfolio's beta. A positive alpha indicates outperformance; negative alpha indicates underperformance. Jensen's original study found that mutual fund managers, on average, generated negative alpha — they underperformed even before fees. This finding laid the groundwork for the passive investing revolution.
Formula
α = Rp - [Rf + β(Rm - Rf)]
How Stoquity Uses This
Stoquity incorporates jensen's alpha analysis across its portfolio management platform, providing real-time monitoring and AI-powered insights for every portfolio.