What Is Jenson's Alpha? Overview, How It's Calculated

What Is Jensen's Alpha? Overview, How It's Calculated

By Kristi Waterworth – Updated Sep 11, 2025 at 7:48 PM EST | Fact-checked by Frank Bass

Key Points

Jensen's Alpha measures whether an asset outperforms, underperforms, or matches its benchmark.
Positive alpha indicates superior performance; negative alpha suggests underperformance.
Calculate alpha using returns, risk-free rate, benchmark returns, and beta of the investment.

Everybody wants to beat the market -- after all, that's the point of buying individual stocks, isn't it? Well, if that's your goal, there's one important metric to understand: Jensen's alpha. Read on to learn more about this magic number and why it matters so much.

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A person using a calculator with financial charts on the desk. — Image source: Getty Images.

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If you find yourself with a negative or neutral alpha, it's going to be important to dig deeper to find the issue. Sometimes, the issue is simply the benchmark to which you're comparing your investment.

For example, a portfolio of established real estate investment trusts (REITs) is unlikely to outperform one that's made up entirely of highly successful tech stocks. The reason you'd choose the REITs, though, is that you want less risk and less volatility -- even if it means smaller rewards.

On the other hand, if you compare that same basket of REITs to the S&P 500 and it's still underperforming, you probably need to shake things up a bit. That is, unless it's caused by a temporary industry blip that will self-correct in time.

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About the Author

Kristi Waterworth has been a contributing real estate and financial expert at The Motley Fool, covering real estate, investing, and personal finance topics, since 2020. Kristi has been interviewed by various TV media outlets and podcasts for her real estate investing expertise – from residential real estate to digital real estate and everything in between. Kristi’s journalist career spans over 25 years, and she has written about real estate investing, homeownership, and home construction specifically for the last decade. She was also previously a licensed Realtor and general building contractor before the Great Recession and housing market collapse. She holds a bachelor’s degree in American history from Columbia College in Missouri.

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