Alpha Calculator: Measure Manager Skill
Our Alpha Calculator computes Jensen's Alpha from CAPM.
Alpha Formula
Alpha = Portfolio Return - [Risk-Free + Beta × (Benchmark - Risk-Free)]
Interpretation
| Alpha | Meaning |
|---|---|
| < 0 | Underperformance |
| 0 | Market-matched (beta-adjusted) |
| > 0 | Outperformance (skill) |
Example: 15% Port, 10% Bench, 3% Rf, Beta 1.2
- Expected: 3% + 1.2 × (10% - 3%) = 11.4%
- Alpha: 15% - 11.4% = 3.6%
- Interpretation: Strong outperformance
How It's Calculated
CAPM expected return, subtract from actual.
Pro Tips
- Positive alpha >0 desirable
- Pair with Beta and Sharpe
- Annualized inputs
- Higher beta amplifies market move
Limitations
- Assumes CAPM validity
- Historical beta
- No transaction costs
Conclusion
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