BacktestFolio · Glossary
Jensen's Alpha
In plain language
If the portfolio returned 12%, the risk-free rate was 2%, the market returned 8%, and Beta is 1.2, Jensen's Alpha is 12% − [2% + 1.2 × 6%] = +2.8%. This is the 'extra' earned beyond what the level of market risk taken justifies.
Technical definition
A specific form of Alpha that measures the excess return above what the CAPM model would predict given the portfolio's Beta: α = Rp − [Rf + β × (Rm − Rf)]. Developed by Michael Jensen in 1968 to evaluate the performance of US mutual funds.