Jensen’s Measure of Portfolio Performance

The Jensen measure is the ratio of your portfolio’s return less the portfolio’s expected return as determined by the capital asset pricing model, or CAPM.

The Jensen measure is calculated as follows:

That is to analyze the performance of an investment manager you must look not only at the overall return of a portfolio, but also at the risk of that portfolio.

Example: If there are two mutual funds that both have a 11% return, a rational investor will want the fund that is less risky.

Jensen’s measure is one of the ways to help 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.

Source: investopedia