Jensen's alpha
Principles of Finance glossary · Risk, Return & Portfolio Theory
Definition
The excess return of a portfolio above its CAPM-predicted return.
Jensen's alpha in plain English
Imagine a rule of thumb that says 'given how risky your bets were, you should have earned about 8%.' Jensen's alpha measures how much MORE (or less) you actually earned than that fair expectation. The 'CAPM-predicted return' is just that fair-for-the-risk benchmark, so alpha is the leftover after you subtract it. A positive alpha is the holy grail of investing: it means the manager added real skill, beating what luck and risk-taking alone would have handed you, while a negative alpha means they underperformed what they should have.
Learn these first
Related Principles of Finance terms
Principles of Finance practice questions · Principles of Finance flashcards · Principles of Finance study guide