Alpha (Jensen's Alpha)
Alpha measures excess return relative to CAPM prediction, indicating manager skill in adding (positive alpha) or losing (negative alpha) value.
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Exam Tip
Alpha = Actual - CAPM Expected. Positive = beat expectations. Uses BETA as risk measure. Most active managers have negative alpha after fees.
What is Alpha?
Alpha = Actual Return - CAPM Expected Return
CAP Expected = Rf + Beta(Rm - Rf)
Interpretation
- Positive: Beat risk-adjusted expectation
- Zero: Performed as expected
- Negative: Underperformed
Most Active Managers
Research shows most have NEGATIVE alpha after fees.