3 Funds With High Alpha For Stellar Returns
Zacks Investment Research | Mar 04, 2020 07:31AM ET
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)))
Where
- 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. Furthermore, an investor should also look at the amount of return a fund has generated compared to the risk involved. It 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, it 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) or 2 (Buy) that are poised to gain from such factors. Moreover, these funds have encouraging three and one-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: Zacks Investment Research
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