Explain jensen's model of performance evaluaction.
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Explanation:
CORPORATE FINANCE & ACCOUNTING FINANCIAL ANALYSIS
Jensen's Measure
REVIEWED BY JAMES CHEN Updated Mar 27, 2019
What is the Jensen's Measure
The Jensen's measure is a risk-adjusted performance measure that represents the average return on a portfolio or investment, above or below that predicted by the capital asset pricing model (CAPM), given the portfolio's or investment's beta and the average market return. This metric is also commonly referred to as Jensen's alpha, or simply alpha.
BREAKING DOWN Jensen's Measure
To accurately analyze the performance of an investment manager, an investor must look not only at the overall return of a portfolio, but also at the risk of that portfolio to see if the investment's return compensates for the risk it takes. For example, if two mutual funds both have a 12% return, a rational investor should prefer the fund that is less risky. Jensen's measure is one of the ways to determine if a portfolio is earning the proper return for its level of risk. If the value is positive, then the portfolio is earning excess returns. In other words, a positive value for Jensen's alpha means a fund manager has "beat the market" with his stock picking skills.