Jensen's Alpha

This video shows how to calculate Jensen's Alpha.
Jensen's Alpha is the portion of the excess return (of a security or a portfolio) that is not explained by systematic risk. Thus, alpha is a risk-adjusted measure of return.
Another way of explaining it is that Jensen's Alpha is the difference between the actual return (of a security or a portfolio) and the return predicted by the Capital Asset Pricing Model.
Jensen's Alpha is calculated as follows:
Alpha = [return of security or portfolio - risk-free rate] - [beta * (market return - risk-free rate)]
For example, let's say that the actual return of a security is 26%, the actual return of the market is 12%, the risk-free rate is 2%, and the beta of the security is 2.00. In this case, alpha would be 4%. This was calculated as follows:
alpha = [26% - 2%] - [2* (12% - 2%)] = 4%
Another way of thinking about it is this: according to the Capital Asset Pricing Model, this security was expected to have a return of 22%. Yet, it had an actual return of 26%. This difference between the expected return (according to CAPM) and the actual return is the alpha. It is the portion of the excess return that is not explained by systematic risk (beta).-
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[@Mojames1984]

Nice and easy explanation of alpha. Thank you!

[@scotfsh5014]

not all heroes wear capes, thank you from the bottom of my heart

[@Edspira]

No problem my friend!

[@aakashtiwari2472]

Nicely explained.

[@hamdiabdi9181]

hi ! your videos are so helpful and informative can you please do a video explaining the M squared ratio

[@brandonspiegel2293]

Thank you!

[@rohanmenezes616]

Just amazing! Thanks!!

[@Edspira]

Glad you liked it!

[@sleepless2541]

What if the intercept is not statistically significant, is it still considered as alpha?

[@BESTCARSPHOTOGRAPHY]

thanks

[@9190onin]

Why do you have Rp-Rf- B(Rm-Rf), when CAPM is Rf+B(Rm-Rf)? In the beginning you have Jensen’s alpha as Rp-Rf+B(Rm-Rf) but then proceed to subtract Rp-Rf and then subtract B(Rm-Rf).

[@prerananayak6406]

According to me Rp-(Rf+beta(Rm-rf)) is right formula

[@alzadid4837]

Title suggested Jensen’s Alpha, this was just alpha

[@jack_crutons]

How do u find risk free rate of a portfolio?

[@rajhanumante6210]

its the government security rate

[@softmusic24]

If I increase the number of risk factors, than my regression line will fit better. Will the value of jensen alpha decrease due to the fact that the manager contribution will be, at least in part, explained by those other factors? So the conclusion is: the more the factors in my regression, the lower the jensen alpha. Is it correct? Thanks

[@sobriquet5016]

Yes, I believe that is correct. This is where many academics have said that the alpha you refer to, has now become smart-beta, or hedge-fund beta - there are many terms that I've come across to describe this transition between what was once unexplained alpha returns but is now, in fact, explainable. And hence, because beta inherently means explainable systematic risk, the alpha becomes beta.

[@soumyak6704]

Board is not clear

[@redah1]

hi, what if the actual return is not given???

[@redah1]

or how do you find the actual return

[@christopherradzanowski3333]

@@redah1 I'm thinking you could use IRR. Can anyone confirm?