The Jensen's Alpha is used to determine the excess return of a stock, other security, or portfolio over the security's required rate of return as determined by the Capital Asset Pricing Model. This model is used to adjust for the level of beta risk, so that riskier securities are expected to have higher returns. The measure was first used in the evaluation of mutual fund managers by Michael Jensen in the 1970's.

Alpha is still widely used to evaluate mutual fund and portfolio manager performance, often in conjunction with the Sharpe ratio and the Treynor Ratio.

Developed by Michael Jensen, Jensen Alpha quantifies the performance of a investment with respect to a benchmark.

The Jensen Alpha is equal to the Investment's average return in excess of the risk free rate minus the Beta multiplied by the benchmark's average return in excess of the risk free rate.

Positive Alphas indicate good performance while negative Alphas indicate weak performance. The period of an Alpha should be for long-term review, 3 years or longer.

 

Calculation:

                r_s = Realized return

                r_rf = Risk-free rate of return

                Beta = Beta coefficient

                r_m = Market return

 

Inputs:

Security = XBANK

Reference Security = XU100

   Indicates risk-free asset.

Risk Free Security = XU030

   Indicates base asset.

Start Day = First day of the date range

End Day = Last day of the date range

Currency

Indicator Type: Relation