HOMEPAGE

Alpha (Jensen’s Alpha)

Definition

Alpha measures the excess return a portfolio generates relative to its expected return based on market risk (beta).

$$\text{Alpha}=\text{Actual Return}-(\text{Risk‑Free Rate}+\beta (\text{Market Return}-\text{Risk‑Free Rate}))$$

Why It Matters

• Shows whether a manager outperformed or underperformed expectations.
• Positive alpha = skill or superior strategy.
• Negative alpha = underperformance.

Example

Expected return = 8% Actual return = 10%

$$\text{Alpha}=10-8=2\mathrm{\%}$$