Calculate Jensen's Alpha to measure a portfolio's excess return above what CAPM predicts given its beta. Use it to test different inputs quickly, compare outcomes, and understand the main factors behind the result before moving on to related tools or deeper guidance.
Last updated
Portfolio Analysis
Jensen’s Alpha measures the excess return a portfolio earns above what the Capital Asset Pricing Model (CAPM) predicts for its level of systematic risk. Positive alpha indicates skill-based outperformance; negative alpha indicates underperformance.
Named after Michael Jensen’s 1968 paper, alpha isolates the manager’s contribution to returns beyond what could be achieved by passively holding a market-beta-equivalent portfolio.
A positive alpha of 2.9% means the portfolio earned 2.9 percentage points more than a passive strategy with the same beta exposure would have delivered.
Alpha is the residual after subtracting the CAPM expected return.
α = Rp − [Rf + β × (Rm − Rf)]
Rp = portfolio return, Rf = risk-free rate, β = portfolio beta, Rm = market return.
Portfolio return 14%, risk-free 4.5%, beta 1.2, market 10%. Expected = 4.5 + 1.2 × 5.5 = 11.1%. Alpha = 14 − 11.1 = 2.9%.
Relies on CAPM, which assumes a single risk factor. Alpha from a single-factor model may be explainable by size, value, or momentum factors (Fama-French). Historical alpha does not guarantee future outperformance.
Frequently asked questions
Not necessarily. Single-factor alpha can be explained by exposure to other risk factors (size, value, momentum). Multi-factor models like Fama-French 3-factor or Carhart 4-factor provide a more rigorous test of manager skill.
Excess return is simply Rp − Rf. Alpha adjusts for risk: it measures excess return above what the portfolio’s beta exposure would have earned. A high-beta portfolio should earn higher excess return — alpha measures whether it earned even more than that.
Any consistently positive alpha after fees is impressive. Most active managers fail to deliver positive alpha over long periods. Even 1–2% annualised alpha sustained over 5+ years is considered strong.
Also in Saving & Investing
You may also need
Related
These related calculators come from the same leaf category, nearby sibling categories, or the same top-level topic.
Calculate the Sharpe ratio from portfolio return, risk-free rate, and standard deviation to assess risk-adjusted performance.
Calculate the Treynor ratio from portfolio return, risk-free rate, and beta to measure systematic-risk-adjusted performance.
Calculate the expected return of a stock using the Capital Asset Pricing Model from risk-free rate, beta, and market return.
Calculate a stock's beta from its historical returns and benchmark returns to measure systematic market risk.
