CAPM & Jensen's Alpha.

Understanding CAPM

The Capital Asset Pricing Model (CAPM) estimates the expected return of an investment based on the level of market risk it assumes. It answers a simple question: “Given the amount of risk taken, what return should an investor reasonably expect?”

It weighs a fund's return against the risk-free rate, its sensitivity to the market, and the return of the overall market — giving a benchmark for what a fund should deliver for the risk it takes.

What is Jensen's Alpha?

While CAPM estimates the return a fund should earn for its risk, Jensen's Alpha measures how much it actually outperformed or underperformed that expectation — the value a manager adds beyond the risk-adjusted benchmark.

• Positive alpha → manager created value beyond expectations
• Zero alpha → fund performed exactly as expected
• Negative alpha → inadequate return for the risk taken

Example comparison

Fund A and Fund B both delivered attractive returns, but Fund A generated far higher risk-adjusted value. Jensen's Alpha identifies the manager who added the most value through investment decisions rather than market movements alone.

Why it matters

Returns alone don't tell the complete story. Seek managers who consistently create value after accounting for the risk they take. CAPM provides the benchmark; Jensen's Alpha measures the value added beyond it — empowering objective, evidence-based selection across Mutual Funds, PMS strategies, AIFs and SIFs.