Jensen's Alpha Solution

STEP 0: Pre-Calculation Summary
Formula Used
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))
α = Rp-(Rf+βp*(Rm-Rf))
This formula uses 5 Variables
Variables Used
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.
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.
Risk Free Interest Rate - Risk Free Interest Rate is the theoretical rate of return of an investment with zero risks.
Beta of the Portfolio - The Beta of the Portfolio is the weighted sum of the individual asset betas.
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.
STEP 1: Convert Input(s) to Base Unit
Annual Return on Investment: 12 --> No Conversion Required
Risk Free Interest Rate: 0.5 --> No Conversion Required
Beta of the Portfolio: 0.85 --> No Conversion Required
Annual return of the market benchmark: 0.4 --> No Conversion Required
STEP 2: Evaluate Formula
Substituting Input Values in Formula
α = Rp-(Rf+βp*(Rm-Rf)) --> 12-(0.5+0.85*(0.4-0.5))
Evaluating ... ...
α = 11.585
STEP 3: Convert Result to Output's Unit
11.585 --> No Conversion Required
FINAL ANSWER
11.585 <-- Jensen's Alpha
(Calculation completed in 00.004 seconds)
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21 Investment Calculators

Portfolio Standard Deviation
Go Portfolio Standard Deviation = sqrt((Asset Weight)^2*Variance of Returns on Assets 1^2+(Asset Weight)^2*Variance of Returns on Assets 2^2+2*(Asset Weight*Asset Weight*Variance of Returns on Assets 1*Variance of Returns on Assets 2*Portfolio Correlation Coefficient))
Portfolio Variance
Go Portfolio Variance = (Asset Weight)^2*Variance of Returns on Assets 1^2+(Asset Weight)^2*Variance of Returns on Assets 2^2+2*(Asset Weight*Asset Weight*Variance of Returns on Assets 1*Variance of Returns on Assets 2*Portfolio Correlation Coefficient)
Jensen's Alpha
Go 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))
Compound Interest
Go Future Value of Investment = Principal Investment Amount*(1+(Annual Interest Rate/Number of Periods))^(Number of Periods*Number of Years Money is Invested)
Certificate of Deposit
Go Certificate of Deposit = Initial Deposit Amount*(1+(Annual Nominal Interest Rate/Compounding Periods))^(Compounding Periods*Number of Years)
Actuarial Method Unearned Interest Loan
Go Actuarial Method Unearned Interest Loan = (Number of Remaining Monthly Payments*Monthly Payment*Annual Percentage Rate)/(100+Annual Percentage Rate)
Equivalent Annual Annuity
Go Equivalent Annuity Cashflow = (Rate per Period*(Net Present Value (NPV)))/(1-(1+Rate per Period)^-Number of Periods)
Portfolio Expected Return
Go Portfolio Expected Return = Asset Weight*(Expected Return on Asset 1)+Asset Weight*(Expected Return on Asset 2)
Total Stock Return
Go Total Stock Return = ((Ending Stock Price-Initial Stock Price)+Dividend)/Initial Stock Price
Annuity Payment
Go Annuity Payment = (Rate per Period*Present Value)/(1-(1+Rate per Period)^-Number of Periods)
Value at Risk
Go Value at Risk = -Mean of Profit and Loss+Standard Deviation of Profit and Loss*Standard Normal Variate
Profitability Index
Go Profitability Index (PI) = (Net Present Value (NPV)+Initial Investment)/Initial Investment
Sharpe Ratio
Go Sharpe Ratio = (Expected Portfolio Return-Risk Free Rate)/Portfolio Standard Deviation
Capital Gains Yield
Go Capital Gains Yield = (Current Stock Price-Initial Stock Price)/Initial Stock Price
Treynor Ratio
Go Treynor's Ratio = (Expected Portfolio Return-Risk Free Rate)/Beta of the Portfolio
Information Ratio
Go Information Ratio = (Portfolio Return-Benchmark Return)/Tracking Error
Rate of Return
Go Rate of Return = ((Current Value-Original Value)/Original Value)*100
Straight Line Depreciation
Go Straight Line Depreciation = (Asset's Cost-Salvage)/Life
Portfolio Turnover Rate
Go Porfolio Turnover Rate = (Total Sales and Purchases of Shares/Average Net Assets)*100
Real Rate of Return
Go Real Rate of Return = ((1+Nominal Rate)/(1+Inflation Rate))-1
Risk Premium
Go Risk Premium = Return on Investment (ROI)-Risk Free Return

Jensen's Alpha 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))
α = Rp-(Rf+βp*(Rm-Rf))

What is Jensen's Alpha?

The Jensen's Alpha or Jensen's Measure is the difference in how much a person returns vs. the overall market. When a manager outperforms the market concurrent to risk, they have "delivered alpha" to their clients. The measure accounts for the risk-free rate of return for the time period. Jensen's measure is one of the ways to determine if a portfolio is earning the proper return for its level of risk. If the value is positive, then the portfolio is earning excess returns. In other words, a positive value for Jensen's alpha means a fund manager has "beat the market" with their stock-picking skills.

How to Calculate Jensen's Alpha?

Jensen's Alpha calculator 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 calculate 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 calculate Jensen's Alpha using this online calculator? To use this online calculator 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. Here is how the Jensen's Alpha calculation can be explained with given input values -> 11.585 = 12-(0.5+0.85*(0.4-0.5)).

FAQ

What is 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 and is represented as α = Rp-(Rf+βp*(Rm-Rf)) or 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)). Annual return on investment is the geometric average amount of money earned by an investment each year over a given time period, Risk Free Interest Rate is the theoretical rate of return of an investment with zero risks, The Beta of the Portfolio is the weighted sum of the individual asset betas & The annual return of the market benchmark is the geometric average amount of money earned from benchmarking each year over a given time period.
How to calculate 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 is calculated using 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 calculate Jensen's Alpha, you need Annual Return on Investment (Rp), Risk Free Interest Rate (Rf), Beta of the Portfolio (βp) & Annual return of the market benchmark (Rm). With our tool, you need to enter the respective value for Annual Return on Investment, Risk Free Interest Rate, Beta of the Portfolio & Annual return of the market benchmark and hit the calculate button. You can also select the units (if any) for Input(s) and the Output as well.
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