The unlikely hero
Ironically, in spite of his comically poor scoring record at club level, it was “JJ” who struck arguably the most important goal in his country’s history versus Germany in 1992, as his memorable 19th minute effort set the Danes on course for European Championship glory.
Do your risk-adjusted returns beat JJ’s goal returns?
Our tenuous investment link, is that Jensen shares his name with a useful ratio for comparing equity portfolio returns against a benchmark. The Jensen measure establishes whether a portfolio has performed in line with its capital asset pricing model (CAPM) benchmark and therefore lies on the Security Market Line (SML), or whether it has out- or under- performed the benchmark and is therefore positioned above or below the SML.
The Jensen ratio is expressed as:
σj = portfolio return – [risk-free rate + portfolio beta x (market return – risk-free rate)]
For example: if the rate on treasury bills is 0.5 per cent; the portfolio beta (measure of systematic or market risk) is 1.2; and the expected market rate of return is 5 per cent.
This would mean the expected return from the portfolio would be:
0.5 + [1.2 x (5 – 0.5)] = 5.9 per cent
If the actual return of the portfolio is 6.5 per cent, then this outperformance is known as Jensen’s alpha.
Jensen’s alpha = 6.5 – 5.9 = 0.6 per cent.
In other words, positive Jensen’s alpha demonstrates better than expected performance, making John Jensen’s match-winning contribution in 1992 quite an apt metaphor!
