Jensen's Alpha is a risk-adjusted performance measure that calculates the excess return of a portfolio or fund above the return predicted by the Capital Asset Pricing Model (CAPM), given the portfolio's Beta and the prevailing risk-free rate. It is calculated as: Jensen's Alpha = Actual Return – [Risk-Free Rate + Beta × (Market Return – Risk-Free Rate)]. A positive Jensen's Alpha indicates that the manager generated returns beyond what could be attributed to market exposure and systematic risk — evidence of genuine investment skill. Unlike simple raw return comparisons, Jensen's Alpha accounts for the amount of market risk taken, making it a fairer measure for comparing managers with different levels of equity exposure. It is widely used in mutual fund performance evaluation in India.
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