Alpha vs. Beta
Jensen’s Alpha
Alpha is a measure of a fund’s risk-adjusted performance. It represents the excess return of the fund compared to its benchmark (Nifty or Sensex). In common investor parlance Alpha is used to denote excess returns.
Fund’s Beta
Beta (β) measures the sensitivity of a fund’s returns to changes in its benchmark index (Nifty or Sensex). It quantifies the fund’s volatility about the overall market.
Metric | Jensen’s Alpha (α) | Beta (β) |
Measures | Mutual Fund’s excess return over Benchmark’s return | Mutual Fund’s volatility relative to the market |
Interpretation | Positive indicates outperformance, while negative reflects underperformance. | Greater than 1 indicates high volatility Lesser than 1 indicates low volatility |
Use Case | Identify skill vs. market-driven returns | Assess systematic risk; portfolio construction |
Example | If an equity fund delivers an 18 % return while its benchmark’s return is 14 %, it has achieved a Jensen’s alpha of 4 % | If the Nifty 50 climbs 10 %, a fund with a beta of 1.5 would typically rise about 15 %, showing it’s 50 % more volatile than the market |
