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Jensen's Alpha Calculator

Measure excess risk-adjusted return with Jensen's alpha.

How it is calculated

Jensen's alpha measures how much a portfolio returned above what the Capital Asset Pricing Model (CAPM) says its risk deserved. First the expected return: E = Rf + β × (Rm − Rf), with the risk-free rate, the portfolio beta and the market return. Then α = Rp − E. All returns are annual percentages entered as plain numbers (12 means 12%) and must cover the same period. Positive alpha means outperformance for the risk taken, negative means underperformance. Beta is not limited to positive numbers, and the result depends on the beta estimate and the chosen market index.

Worked example

Portfolio return 12%, risk-free 3%, beta 1.2, market return 9%. Market premium = 9 − 3 = 6. Expected return = 3 + 1.2 × 6 = 10.20%. Alpha = 12 − 10.20 = 1.80%. The manager earned 1.80 percentage points more than the CAPM benchmark for that level of risk.

Try this example →

Common mistakes

  • Entering returns as decimals (0.12) while the tool expects percent numbers (12), which makes alpha nearly zero.
  • Using the market return alone instead of the premium over the risk-free rate in the CAPM step.
  • Mixing periods, such as a monthly portfolio return with an annual market return.
  • Reading alpha as a skill guarantee; it depends on the chosen benchmark and beta estimate.

Sources

About this calculator

Jensen's alpha measures the return a portfolio earned above what the Capital Asset Pricing Model (CAPM) predicted was fair compensation for its risk: α = Rp − [Rf + β(Rm − Rf)], where Rp is the portfolio's actual return, Rf the risk-free rate, β the portfolio's sensitivity to the market, and Rm the market return. A positive alpha means the manager beat the return justified by the risk (beta) taken; a negative alpha means they underperformed even after accounting for risk.

Developed by economist Michael Jensen in 1968 to evaluate mutual fund managers, it remains a core tool for portfolio managers, financial analysts, and investors deciding whether active management is adding genuine value versus simply taking on more market risk.

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Comments (1)

  • Editorial team

    Try a worked case: portfolio 14%, risk-free 3%, beta 1.2, market 10%. Expected return is 3 + 1.2 × 7 = 11.4%, so alpha is 2.6 points. A single year says little, though, because one good or bad period can swamp the result, and a different market index changes both beta and the verdict. Keep every input on the same period. Which index do you use as your market benchmark, and over how long a window?

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