To calculate the Jensen measure, use the following formula:
Jensen’s alpha = Ra – [Rf + b(Rm – Rf)]
where:
Ra = return on actual portfolio
Rf = risk-free return
Rm = market return
b = beta of portfolio
The Jensen measure for Miranda Fund is:
0.102 – [0.02 + 1.10(–0.225 – 0.02)] = 0.3515
Jensen’s Alpha measures the excess return for a given level of systematic risk. It also measures the value added of an active strategy. Jensen’s Alpha indicates that the excess return for the Miranda Fund was 35.15 percentage points more than the return implied by the CAPM/Security Market Line. Because Jensen’s Alpha should be used to compare well-diversified portfolios having the same betas, it would not be the best measure for assessing the value added by Blakely
