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Chapter 4: Regression Analysis > Jensen's alpha (Jensen's measure or Jensen's d...

Jensen's alpha (Jensen's measure or Jensen's differential return or ex-post alpha)

Jensen's alpha is the intercept of the regression equation in the capital asset pricing model and is in effect the excess return adjusted for systematic risk.

Ignoring the error term for ex-post calculations and using Equation 4.5:

(4.7) Unnumbered Display Equation

Note the similarities to the related formula for differential return Equation 9.6 in Chapter 9 (Risk-adjusted returns), hence the alternative name, Jensen's differential return.

Portfolio managers often talk in terms of alpha to describe their added value, rarely are they referring to either the regression or even Jensen's alpha. In all probability they are referring to their excess return above the benchmark. Confusingly academics also frequently refer to excess return as the return above the risk free rate.


  

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