where 
calculating this metric using the formula above can result in one of three possible outcomes jensen s measure is also commonly referred to as jensen s alpha understanding jensen s measurejensen s measure was developed by economist michael jensen in 1968 as a way to calculate investment returns while taking risk into account 1 as noted above jensen s measure is a financial performance metric that adjusts for risk investors and investment professionals can use the formula above to calculate the excess returns of an investment or portfolio s expected returns the expected returns are measured using the capm this is a model that is used to calculate an investment s expected rate of return investors and investment professionals can determine whether the price of an asset such as a stock bond or other security conforms to its expected return by factoring in things like risk and the time value of money tvm jensen s measure can also be used to accurately analyze the performance of an investment manager to do so an investor must look at the overall return of a portfolio in addition to the risk of that portfolio the goal is to see if the investment s return compensates for the risk it takes for example if two mutual funds both have a 12 return a rational investor should prefer the less risky fund jensen s measure is one of the ways to 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 beats the market with their stock picking skills criticism of jensen s measurecritics of jensen s measure generally believe in the efficient market hypothesis emh which was invented by eugene fama emh is a theory that suggests that an asset s price trades at its fair value and accounts for all variables including risk as such people who follow emh believe that investors can consistently beat the market as such critics argue that any portfolio manager s excess returns derive from luck or random chance rather than skill because the market already prices in all available information it is said to be efficient and accurately priced further supporting the theory is the fact that many active managers fail to beat the market any more than those who invest money in passive index funds example of jensen s measurehere s a hypothetical example to show how jensen s measure works let s assume that a mutual fund s realized return was 15 last year the appropriate market index for this fund returned 12 the beta of the fund versus that same index is 1 2 and the risk free rate is 3 the fund s alpha is calculated as given a beta of 1 2 the mutual fund is expected to be riskier than the index as such it is expected to earn more a positive alpha in this example shows that the mutual fund manager earned more than enough return to be compensated for the risk taken over the year if the mutual fund only returned 13 the calculated alpha would be 0 8 with a negative alpha the mutual fund manager would not have earned enough return given the amount of risk they were taking 