- Date : 27/12/2022
- Read: 3 mins
You can use Jensen's Alpha model to understand if your PMS fund manager is doing a poor or a good job.
You can use Jensen's Alpha model to understand if your PMS fund manager is doing a poor or a good job. It shows how much RoR (rate of return) on your investment portfolio can be attributed to your PMS fund manager and his ability to get better than average results after considering risk. Michael Jensen propounded the Jensen's Alpha or Jensen's measure in 1968. It tracks mutual fund manager and their performance through a risk-adjusted technique.
Read: Is your PMS underperforming? Read this before exiting
How can you see how your fund manager is performing?
Jensen's measure calculates a portfolio's return over its expected return. The return you get in access will be attributed to the fund manager due to his stock selection skill and time of buying individual stocks. The model will help you gauge if your investment performed worse or better than the beta value suggests. The model derives from the CAPM (capital asset pricing model).
Jensen's Measure
Beta shows how perfectly your investment follows the downward and upward movement of the indices. An investment with over 1 beta indicates that your fund (PMS fund) or stock is more volatile than the market. It means there is a greater risk for gains or losses according to the indices' movement.
Let's Look at the Mechanics
Assuming that a mutual fund (PMS fund) or portfolio returned 17%, the market index would be 12.5%. The fund's beta vs. the index equals 1.4 and contains a 1.4 risk-free rate.
So, Jensen’s Alpha = 17 – [4 + 1.4 *(12.5-4)] = 17 – [4 + 1.4* 8.5] = 17 – [4 + 11.9] = 1.1%.
A 1.4 beta suggests the stocks or the fund are riskier and might earn more than the market index. A positive alpha indicates that the PMS fund manager or the fund manager made more returns for the additional risk they undertook. A fund with 15% returns would have a -0.9 computed alpha. When the alpha is negative, the fund manager did not make enough returns for the assumed risk.
Read: What to do when your mutual fund manager exits?
Investors should be wary of the risks associated with investments. They must be aware of the rate of return for the level of risk involved. An investor always aims to get maximum returns with minimal risks. It means that out of two mutual funds offering the same returns, the one with lesser risk would entice the investor to invest more. You can use Jensen's Alpha to calculate if the rate of return is good enough for the risk involved. It shows the performance of the PMS fund manager and if their generated returns did well. Superior returns mean the fund manager is doing well by choosing undervalued shares or predicting returns correctly.
What is PMS, and how does it work?
You can use Jensen's Alpha model to understand if your PMS fund manager is doing a poor or a good job. It shows how much RoR (rate of return) on your investment portfolio can be attributed to your PMS fund manager and his ability to get better than average results after considering risk. Michael Jensen propounded the Jensen's Alpha or Jensen's measure in 1968. It tracks mutual fund manager and their performance through a risk-adjusted technique.
Read: Is your PMS underperforming? Read this before exiting
How can you see how your fund manager is performing?
Jensen's measure calculates a portfolio's return over its expected return. The return you get in access will be attributed to the fund manager due to his stock selection skill and time of buying individual stocks. The model will help you gauge if your investment performed worse or better than the beta value suggests. The model derives from the CAPM (capital asset pricing model).
Jensen's Measure
Beta shows how perfectly your investment follows the downward and upward movement of the indices. An investment with over 1 beta indicates that your fund (PMS fund) or stock is more volatile than the market. It means there is a greater risk for gains or losses according to the indices' movement.
Let's Look at the Mechanics
Assuming that a mutual fund (PMS fund) or portfolio returned 17%, the market index would be 12.5%. The fund's beta vs. the index equals 1.4 and contains a 1.4 risk-free rate.
So, Jensen’s Alpha = 17 – [4 + 1.4 *(12.5-4)] = 17 – [4 + 1.4* 8.5] = 17 – [4 + 11.9] = 1.1%.
A 1.4 beta suggests the stocks or the fund are riskier and might earn more than the market index. A positive alpha indicates that the PMS fund manager or the fund manager made more returns for the additional risk they undertook. A fund with 15% returns would have a -0.9 computed alpha. When the alpha is negative, the fund manager did not make enough returns for the assumed risk.
Read: What to do when your mutual fund manager exits?
Investors should be wary of the risks associated with investments. They must be aware of the rate of return for the level of risk involved. An investor always aims to get maximum returns with minimal risks. It means that out of two mutual funds offering the same returns, the one with lesser risk would entice the investor to invest more. You can use Jensen's Alpha to calculate if the rate of return is good enough for the risk involved. It shows the performance of the PMS fund manager and if their generated returns did well. Superior returns mean the fund manager is doing well by choosing undervalued shares or predicting returns correctly.
