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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.

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Related Terms

Beta

Beta is a measure of a security's volatility relative to the overall market, where a beta of 1.0 means the security moves with the market, above 1.0 means more volatile, and below 1.0 means less volatile.

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