Jensen's Alpha

What is Jensen's Alpha?

Jensen's Alpha measures a portfolio manager's value-added by comparing actual returns to the CAPM benchmark return. A positive alpha means the manager generated returns above what could be attributed to market exposure alone — genuine outperformance net of systematic risk. A negative alpha indicates the manager underperformed their risk-adjusted benchmark. Alpha is calculated as the actual return minus the CAPM expected return: α = R_actual − [Rf + β(Rm − Rf)]. Because alpha is risk-adjusted, comparing alphas across portfolios with different betas is more meaningful than comparing raw returns. Alpha is at the core of active fund management evaluation and is used alongside the Sharpe ratio and Information Ratio to assess manager skill.