FRM Glossary · Part I · Investment

Jensen's Alpha

The intercept of a portfolio's excess returns regressed on the market's excess returns — a CAPM-adjusted performance measure.

In more detail

α = R_p − [R_f + β_p × (R_m − R_f)]. Positive alpha indicates outperformance after adjusting for systematic risk. Jensen's alpha assumes CAPM is the correct pricing model — multi-factor alphas (Fama-French, Carhart) extend the idea.