Jensen’s Alphas is a "risk-adjusted" performance index and it measures the increased return or extra-return that a unit investment trust has achieved as compared to the expected return based on its systematic level of risk1.
The quality of a fund is normally measured comparing its performance and its benchmark. In an actively managed fund, the investment manager tries to beat the fund’s benchmark by overweighing or underweighing certain stocks, which he/she believes to be over or under-rated, inside the fund’s portfolio, and consequently it disassociates the fund from its benchmark. If we take the systematic risk of a fund to be beta () and the correlation between the performance of a fund and its benchmark, the funds that have a high value for Jensen’s Alphas have achieved a greater return (or extra-return) as compared to what they would have obtained solely from their level of systematic risk.
To calculate Jensen’s Alphas we need to know:
- the average ratio between the observed fund and a risk-free fund;
- the co-efficient beta () of the fund;
- the average ratio between the performance of the benchmark and that of a risk-free operation.
1Assogestioni, (2006), "Guida italiana al risparmio gestito", Milano.
Editor: Mirko IORI
© 2009 ASSONEBB