Jensen's Index

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Jensen's Index

A measure of the return on a portfolio over what the capital asset pricing model predicts, given the beta and market return on that portfolio. The index also adjusts for risk. It is also called Jensen's alpha or Jensen's measure. It is calculated as:

Jensen's Index = ((Portfolio's return - Risk-free return) + (Market return - Risk-free return)) * Beta
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The results are valid both for excess average return and for the Jensen's alpha and the Sharpe ratio.
In his recent book "The Incredible Shrinking Alpha" (an easy and essential read for any advisor), Larry Swedroe, director of research for Buckingham Strategic Wealth, lays out the convincing argument that the investment industry spends far too much time chasing any hint of Jensen's alpha, and not enough time paying attention to science.
In order to achieve this it uses Jensen's alpha to identify stocks that provide higher actual returns compared to their expected returns when considering systematic risk as derived by the capital asset pricing model.
Del Guercio and Tkac (2002) find empirical evidence of a linear relationship between the flows and performance of US pension funds, in which Jensen's alpha was particularly significant as a measure of performance.
Earlier studies of fund performance evaluation are started with the models based on Jensen's alpha (i.
Point estimates of Jensen's alpha provide some evidence of superior returns, although none of the individual point estimates is statistically significant at the 5% level.
These composite portfolio performance measures are the Sharpe ratio, the Treynor ratio, the Jensen's alpha measure, and the information ratio.
The latter use either Jensen's alpha as a single output or both the Sharpe ratio and Jensen's alpha as outputs and some ETFs characteristics as inputs.
Redman, Gullett and Manakyan (2000) examined the risk-adjusted returns using Sharpe's Index, Treynor's Index, and Jensen's Alpha for five portfolios of international mutual funds and for three time periods: 1985-1994, 1985-1989, and 1990-1994.
The Jensen's alpha evaluates the performance of an investment in terms of excess return over the theoretical return of the portfolio using the CAPM.
Jensen's Alpha, and two financial performance measures: the Sharpe Performance Index [SPI], and the Treynor Performance Index [TP1].
Jensen's Alpha is the difference between the actual return from a portfolio and that of Equilibrium Average Return ([EAR.