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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Although the returns rankings based on Jensen's measure is a helpful tool in analyzing relative fund performance, the Jensen's alpha is a more meaningful metric when viewed from an absolute returns standpoint.
Interestingly, none has a significant t-value for the Jensen's measure for period 1971-80 [Mathematical Expression Omitted].
Klemosky (1973) introduced mean absolute deviation and semi-standard deviation as risk surrogates compared to the composite measures derived from the CAPM to remove bias in Sharpe, Treynor, and Jensen's measures. John and McDonald (1974) identified that more aggressive funds experience better results due to the relationship between objective and risk-adjusted performance.