Takes the CAPM-expected return this site’s CAPM calculator computes and compares it against what a portfolio actually returned.
How it works
The CAPM-expected return (risk-free rate plus beta times the market risk premium) is subtracted from the actual portfolio return — the difference is Jensen’s alpha, positive if the portfolio outperformed its risk-adjusted expectation.
What this does not include
This uses a single period’s actual and expected returns — a more robust analysis typically regresses alpha across many periods rather than relying on one snapshot comparison.
How to use this calculator
- Enter actual portfolio return, the risk-free rate, beta, and market return.
A worked example
A portfolio returning 12%, risk-free rate 3%, beta 1.2, market return 10%: expected return = 3 + 1.2×(10−3) = 11.4%, Jensen’s alpha = 12 − 11.4 = 0.6% — modest outperformance after adjusting for risk taken.
What the variables mean
| Variable | Meaning |
|---|---|
| Actual return | The portfolio’s realized return |
| Risk-free rate | Return available from a virtually risk-free investment |
| Beta | The portfolio’s market sensitivity |
| Market return | The overall market’s return over the same period |
Edge cases worth knowing
A positive alpha means the manager beat what the CAPM model predicted given the risk taken — not just beating the market outright, but beating the risk-adjusted expectation, a more demanding bar.
A negative beta makes the expected return calculation behave unusually — a negative-beta asset should move opposite the market, an edge case the calculator declines to show a result for.
Frequently asked questions
What does a positive alpha mean?
The portfolio earned more than its beta and the market’s performance alone would predict — often interpreted as a sign of manager skill, though it could also reflect luck or unmeasured risk.
How is this different from just comparing returns to the market?
Jensen’s alpha adjusts the comparison for the portfolio’s specific risk level (beta) first — a high-beta portfolio is expected to outperform the market in up periods, so alpha isolates the return beyond that risk-adjusted expectation.
Can alpha be negative even with positive returns?
Yes — if the portfolio’s positive return still falls short of what its risk level (beta) implied it should have earned given market performance, alpha is negative.
