A criticism of Jensen's alpha is that:

A) it can only be applied to individual shares
B) it can only be used on portfolios
C) it fails to measure consistent performance
D) none of these chocies

Question

A criticism of Jensen's alpha is that:

A) it can only be applied to individual shares
B) it can only be used on portfolios
C) it fails to measure consistent performance
D) none of these chocies

Quizplus · Accepted Answer

As Jensen's alpha assumes that the CAPM is the appropriate benchmark,to the extent that the validity of the CAPM is questioned,so too is the validity of Jensen's alpha.The measure relies upon an estimate of beta that may be problematic.Further,the measure is claimed to measure only depth and not breadth.For instance,a fund manager may have invested in a large number of stocks on which several small losses have been made,but also picked a stock on which a substantial profit was made.The resultant value of Jensen's alpha could be positive,but this is due to one lucky winner and not consistent performance across the portfolio.In such a case,it could be incorrectly concluded that the manager had superior skills.The measure also equally weights superior and inferior performance.Arguably,investors are more concerned with under-performance than over-performance.

A Criticism of Jensen's Alpha Is That