Jensen’s alpha
Certified Financial Planner glossary · Certified Financial Planner
Definition
Return earned in excess of that required by the security market line.
Jensen’s alpha in plain English
A fund beat the market last year, and the brochure calls that "alpha." Jensen's alpha asks a stricter question: return earned in excess of that required by the security market line given the portfolio's beta. Beating a raw index is not the same as earning more than CAPM said you should for the risk taken. Positive alpha suggests outperformance after systematic risk; negative alpha suggests underperformance. Mention SML or required return for beta and you want Jensen's alpha as the residual, not Sharpe and not Treynor.
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