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Alpha is a risk adjusted performance measure that is the average return on a portfolio over and above that predicted by the CAPM (Capital Asset Pricing Model), given the portfolio's beta, or volatility, and the average market return. This is the portfolio's alpha, in fact the term is sometimes described as "Jensen's alpha." Jensen's Alpha: a = Rp - [ Rf + Bp ( Rm - Rf) ] Jensen’s Alpha = Return of Portfolio – [Risk-free return + Beta(Return of Market – Risk free Return)] . The basic idea is to quantify the return achieved by the investment manager for the amount of risk in the portfolio compared to the market in general. For example, if there are two mutual funds that both have a 12% 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. In other words, a positive value for Jensen's alpha means a fund manager has "added value" with his or her investment strategy.

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