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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Important Formulas of Investment Calculators

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)
Capital Gains Yield
​ Go Capital Gains Yield = (Current Stock Price-Initial Stock Price)/Initial Stock Price
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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