Jensen's alpha

Jensen's alpha is a portfolio's actual return minus its CAPM-predicted return. A positive value signals risk-adjusted outperformance relative to passive market exposure and is the standard metric for evaluating active fund management.

ByHoang TruongUpdated July 3, 2026

FrameworkRisk-adjusted performance

See it move

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A fund with beta 1.1 should earn 3% + 1.1 × (10% − 3%) = 10.7% under CAPM, given a 3% risk-free rate and 10% market return. It actually earned 12%, so Jensen's alpha is +1.3% — the manager's return above what passive exposure at the same risk level would have delivered.

Where it fits

TopicRisk, Return & the CAPMAdvancedSubjectCorporate FinanceAdvanced

The formula

LaTeX

\alpha = R_p - \left[R_f + \beta_p(R_m - R_f)\right]

Variables

$α$: Jensen's alpha: risk-adjusted excess return above the CAPM prediction
$R_{p}$: actual portfolio return over the period
$R_{f}$: risk-free rate over the same period
$β_{p}$: portfolio beta
$R_{m}$: market return over the same period

The bracketed term is the CAPM-predicted return for the portfolio's level of systematic risk. A positive alpha means the manager added value above what passive market exposure at the same beta would have delivered.

Check yourself

PracticeCORE

A fund returns 14 per cent over the year. In the same period, the market index returns 10 per cent and the risk-free rate is 3 per cent. The fund's beta is 1.2. What is Jensen's alpha?

Select an answer to check your understanding.