Jensen's Measure

Categories: Metrics, Investing

Jensen’s measure is a metric that measures the average return an investment portfolio can be expected to have relative to the capital asset pricing model, given the risks of the assets inside the portfolio.

If you’re in the investor world enough to know the lingo, Jensen’s measure is oftentimes called “alpha,” since it’s relative to a portfolio’s beta.

Predicting portfolio returns is sort of the Blind Man's Bluff game of Wall Street stock brokers. You're fooling yourself if you’re not including risk in those projections. Jensen’s measure helps investors get a realistic look at returns, and helps them see if the returns they’re getting make sense given the amount of risk involved.

Mathematically, Jensen’s measure (alpha) equals the realized return of the portfolio...minus the risk-free rate of return...plus the realized return of the corresponding market index...minus the risk-free rate of return (again)...times the beta. A positive Jensen measure means that the investment portfolio is “beating the market,” whereas a negative Jensen measure means it might be time to shake up that portfolio.

Maybe with a portmanteau...Jeasure? Jensure? Invefolio?

Find other enlightening terms in Shmoop Finance Genius Bar(f)