How this number is made
Jensen's alpha is the return that is left after you subtract what the capital asset pricing model required for the beta. A positive number means the portfolio beat that hurdle. It is not a forecast, and a beta from last year may not be the beta that applied.
- Use realized numbers if you are grading a past period. Do not mix a forecast with a result.
- The market return is the benchmark you used to estimate the beta.
Formula
Alpha = portfolio return − (risk-free rate + beta × (market return − risk-free rate)).
Worked example
With the figures already in the form, alpha is 1.00%.
Questions
Is this the same as the CAPM page?
The CAPM page stops at the required return. This page subtracts that required return from the return you actually type.
Does a positive alpha pay the bills?
Not after fees, unless you already took the fees out of the portfolio return.