In 1968, the economist Michael Jensen developed the Alfa factor, a method for measuring risk-adjusted performance. Alpha is defined as the incremental return a portfolio has generated versus the return it should have made based on its risk level. In other words, it does not depend on market developments, but measures an investment fund manager’s ability to achieve excess returns in selecting financial assets to include in a portfolio relative to the level of systematic risk (a measure of Beta). If you compare two funds within the same category, the fund with a higher Jensen alpha is the one whose manager was more competent.
See also Beta
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