What is Jensen’s Alpha?

Jensen's Alpha or Jensen's Alpha is an indicator that measures the ability of an investment portfolio manager to achieve returns above the risk-adjusted benchmark index that it indicates. In other words, it is about comparing the difference obtained by a fund or portfolio against a benchmarking with the same amount of risk. If we compare it with one from Spain, it would be with the Ibex35.

To calculate it, the following formula is used:

ratio alpha

Rc: is the profitability of the portfolio
Rf: is the risk-free asset
Rm: the profitability of the market or the benchmark index (IBEX35 in the case of Spain)
Bc: portfolio beta

And then, what can this indicator do for us?

This ratio It will help us to have a greater ability to obtain better results than those obtained in the market. To do this, as we have already explained previously, a reference stock index (the Ibex35) is taken and a comparison is made using the formula previously exposed.

In addition, we can compare different portfolios, fondos de inversión or any type of asset that has as reference another stock market indicator in which we can make a comparison. The main objective is to determine if we add value compared to investing directly in the market through index funds.

One aspect in favor of this type of ratio is that portfolio diversification is not taken into account; In other words, how it is composed and its volatility are not addressed. Thus, the portfolio can be made up of different financial assets, as long as it presents the same risk as the portfolio that we intend to compare.

Leave a Comment