Jensen’s alpha, also referred to as ex-post alpha, essentially measures how much extra a portfolio has earned above the return predicted by the capital asset pricing model (CAPM). This ratio was developed by American economist Michael Jensen in 1968. Mathematically, the Jensen’s alpha is calculated as follows:
Jensen’s alpha = R(i) – (R(f) + B x (R(m) – R(f)))
- R(i) = the realized return of the portfolio or investment
- R(m) = the realized return of the appropriate market index
- R(f) = the risk-free rate of return for the time period
- B = the beta of the portfolio of investment with respect to the chosen market index
A positive Jensen’s alpha indicates that managers of the fund, through careful stock selection, have been able to extract higher returns than the market. Moreover, an investor should also look at the return a fund has generated compared to the risk involved. This is because investors need to be aware of a properly calculated measure of total return from an investment against the inherent risks involved.
3 Best Choices
Also known as the Jensen’s Performance Index, Jensen’s alpha measures the return of an investment compared to its expected risk-adjusted return. We have, thus, selected three mutual funds carrying a Zacks Mutual Fund Rank #1 (Strong Buy) that are poised to gain from such factors. Moreover, these funds have encouraging three and five-year returns.
Additionally, the minimum initial investment is within $5000 and each of these funds has a high three-year alpha. A positive alpha indicates that the portfolio manager was able to earn substantial returns compared to the additional risk taken over the entire period of investment.
We expect these funds to outperform their peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance but also on the likely future success of the fund.
The question here is: why should investors consider mutual funds? Reduced transaction costs and diversification of portfolio without several commission charges that are associated with stock purchases are primarily why one should be parking money in mutual funds (read more: Mutual Funds: Advantages, Disadvantages, and How They Make Investors Money).
AB Large Cap Growth Fund Advisor Class (APGYX – Free Report) seeks long-term appreciation of capital. The fund invests primarily in equity securities of a limited number of large and high-quality U.S. companies, selected for their growth potential within different market sectors. The fund invests primarily in common stocks of large-capitalization companies.
This Large Cap Growth product has a history of positive total returns for more than 10 years. To see how this fund performed compared in its category, and other 1 and 2 Ranked Mutual Funds, please click here.
APGYXhas an annual expense ratio of 0.61%, which is below the category average of 1.04%. The fund has three and one-year returns of 37.9% and 20.1%, respectively. ALCKXhad an alpha of 6.82 in the last three years.
Columbia Thermostat Fund Advisor Class (CTORX – Free Report) aims for long-term capital appreciation. CTORX is a fund that invests in other funds and seeks to achieve its investment objective by investing in a selected group of underlying stocks, bond mutual funds as well as ETFs. It allocates at least 95% of its net assets among the portfolio funds with respect to the current level of Standard & Poor’s (S&P) 500 Index.
This Allocation Balanced product has a history of positive total returns for over 10 years. To see how this fund performed compared in its category, and other 1 and 2 Ranked Mutual Funds, please click here.
CTORXhas an annual expense ratio of 0.64%, which is below the category average of 1.36%. The fund has three and one-year returns of 28.6% and 14.9%, respectively. CTORXhad an alpha of 9.11 in the last three years.
Lord Abbett Convertible Fund Class F (LBFFX – Free Report) seeks current income as well as the opportunity to produce high total return by investing majority of its assets in a diversified portfolio of convertible securities issued by both domestic and foreign companies.
This Convertible Bonds product has a history of positive total returns for more than 10 years. To see how this fund performed compared in its category, and other 1 and 2 Ranked Mutual Funds, please click here.
LBFFX has an annual expense ratio of 0.96%, which is below the category average of 1.16%. The fund has three and one-year returns of 27.8% and 69%, respectively. LBFFX had an alpha of 14.59 in the last three years.
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