Jensen’s Alpha is used to measure how well a mutual fund has performed compared to its expected return, considering the fund's risk. It helps investors understand whether a fund manager has added value through smart investment decisions. A positive alpha means the fund performed better than expected; a negative alpha means it underperformed. This makes Jensen’s Alpha a useful tool to check the real performance of a mutual fund.

What is Jensen’s Alpha in Mutual Fund Analysis?

Jensen’s Alpha is a financial metric that shows how much excess return a mutual fund earns compared to what is expected based on its market risk (beta). It tells whether the fund manager’s decisions have added value beyond what the market alone would give. Positive alpha is good; negative alpha is a warning sign.

How is Jensen’s Alpha Calculated?

Jensen’s Alpha is calculated using the formula: Alpha = Actual Return - [Risk-Free Rate + Beta × (Market Return - Risk-Free Rate)]. This shows whether the fund's actual return is higher or lower than the return predicted by its beta. The result helps investors understand if the manager outperformed or underperformed based on risk taken.

Why is Jensen’s Alpha Important in Mutual Fund Selection?

Jensen’s Alpha is important because it tells if the fund manager is really adding value or just riding the market trend. A fund with consistently positive alpha may have a skilled manager. It helps you select funds that perform well even after adjusting for risk, rather than just looking at high returns alone.

How Does Jensen’s Alpha Help in Comparing Mutual Funds?

Jensen’s Alpha helps you compare multiple mutual funds by showing which one has generated better returns after adjusting for risk. A fund with a higher alpha is usually better because it means the manager has made smart investment choices. It’s especially helpful when all the funds have similar returns but different risk levels.

Can Jensen’s Alpha Be Used with Other Metrics?

Yes, Jensen’s Alpha should be used along with other metrics like Sharpe Ratio and Beta. While Sharpe shows return per unit of risk, Jensen’s Alpha shows how much extra return the manager delivered. Using all these together gives a better and clearer view of mutual fund performance and helps in smart investment decisions.

What Does a Negative Jensen’s Alpha Indicate?

A negative Jensen’s Alpha means the fund performed worse than expected for its risk level. This could mean poor investment choices by the fund manager. If a fund consistently shows negative alpha, it may not be the best choice for investors who want stable and smart returns. Always check alpha before investing.