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Jensen's Alpha Formula

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Jensen's Alpha is used to measure the risk-adjusted performance of a security or portfolio in relation to the expected market return. Check FAQs

α = Rp - (Rf + βp \cdot (Rm - Rf))

α - Jensen's Alpha?Rp - Annual Return on Investment?Rf - Risk Free Interest Rate?βp - Beta of the Portfolio?Rm - Annual return of the market benchmark?

Jensen's Alpha Example

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Here is how the Jensen's Alpha equation looks like with Values.

Here is how the Jensen's Alpha equation looks like with Units.

Here is how the Jensen's Alpha equation looks like.

11.585 = 12 - (0.5 + 0.85 \cdot (0.4 - 0.5))

11.585 = 12 - (0.5 + 0.85 \cdot (0.4 - 0.5))

11.585 = 12 - (0.5 + 0.85 \cdot (0.4 - 0.5))

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Jensen's Alpha Solution

Follow our step by step solution on how to calculate Jensen's Alpha?

FIRST Step Consider the formula

α = Rp - (Rf + βp \cdot (Rm - Rf))

Next Step Substitute values of Variables

∴

α = 12 - (0.5 + 0.85 \cdot (0.4 - 0.5))

Next Step Prepare to Evaluate

∴

α = 12 - (0.5 + 0.85 \cdot (0.4 - 0.5))

LAST Step Evaluate

∴

α = 11.585

Jensen's Alpha Formula Elements

Variables

Jensen's Alpha

Jensen's Alpha is used to measure the risk-adjusted performance of a security or portfolio in relation to the expected market return.

Symbol: α

Measurement: NAUnit: Unitless

Note: Value can be positive or negative.

Formulas to find Jensen's Alpha

Annual Return on Investment

Annual return on investment is the geometric average amount of money earned by an investment each year over a given time period.

Symbol: Rp

Measurement: NAUnit: Unitless

Note: Value should be greater than 0.

Formulas to find Annual Return on Investment

Risk Free Interest Rate

Risk Free Interest Rate is the theoretical rate of return of an investment with zero risks.

Symbol: Rf

Measurement: NAUnit: Unitless

Note: Value should be greater than 0.

Formulas to find Risk Free Interest Rate

Beta of the Portfolio

The Beta of the Portfolio is the weighted sum of the individual asset betas.

Symbol: βp

Measurement: NAUnit: Unitless

Note: Value should be greater than 0.

Formulas to find Beta of the Portfolio

Annual return of the market benchmark

The annual return of the market benchmark is the geometric average amount of money earned from benchmarking each year over a given time period.

Symbol: Rm

Measurement: NAUnit: Unitless

Note: Value can be positive or negative.

Formulas to find Annual return of the market benchmark

Other formulas in Important Formulas of Investment category

Go Certificate of Deposit

CD = P0 Deposit \cdot {(1 + (\frac{r Annual}{n c}))}^{n c \cdot n t}

Go Compound Interest

FV = A \cdot {(1 + (\frac{i}{n}))}^{n \cdot T}

Go Capital Gains Yield

CGY = \frac{P c - P0}{P0}

Go Risk Premium

RP = ROI - Rf return

How to Evaluate Jensen's Alpha?

Jensen's Alpha evaluator uses Jensen's Alpha = Annual Return on Investment-(Risk Free Interest Rate+Beta of the Portfolio*(Annual return of the market benchmark-Risk Free Interest Rate)) to evaluate the Jensen's Alpha, Jensen's Alpha is used to measure the risk-adjusted performance of a security or portfolio in relation to the expected market return. Jensen's Alpha is denoted by α symbol.

How to evaluate Jensen's Alpha using this online evaluator? To use this online evaluator for Jensen's Alpha, enter Annual Return on Investment (Rp), Risk Free Interest Rate (Rf), Beta of the Portfolio (βp) & Annual return of the market benchmark (Rm) and hit the calculate button.

FAQs on Jensen's Alpha

What is the formula to find Jensen's Alpha?

The formula of Jensen's Alpha is expressed as Jensen's Alpha = Annual Return on Investment-(Risk Free Interest Rate+Beta of the Portfolio*(Annual return of the market benchmark-Risk Free Interest Rate)). Here is an example- 11.585 = 12-(0.5+0.85*(0.4-0.5)).

How to calculate Jensen's Alpha?

With Annual Return on Investment (Rp), Risk Free Interest Rate (Rf), Beta of the Portfolio (βp) & Annual return of the market benchmark (Rm) we can find Jensen's Alpha using the formula - Jensen's Alpha = Annual Return on Investment-(Risk Free Interest Rate+Beta of the Portfolio*(Annual return of the market benchmark-Risk Free Interest Rate)).

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Jensen's Alpha Formula

Jensen's Alpha Example

Jensen's Alpha Solution

Jensen's Alpha Formula Elements

Other formulas in Important Formulas of Investment category

How to Evaluate Jensen's Alpha?

FAQs on Jensen's Alpha

Variable Name