What is Alpha?

Alpha is an excess portfolio return, introduced by Michael C Jensen in his doctoral dissertation (1968) and subsequent JOF article (1968).

Sharpe ratio, Jensen Alpha and Treynor ratio are three leading, fundamental benchmarks to measure portfolio returns.

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A Tribute to Professor Michael C. Jensen

Michael C Jensen

(Nov 30,1939 - April 2,2024)

I am deeply saddened by the sudden demise of Professor Michael Cole Jensen on April 2, 2024. He was 84.

He was one of the very few early contributors in the field of finance & economics. He did his PHD (Finance) in 1968 (dissertation: Mutual Fund Performance) from University of Chicago. His doctoral advisors were professors Merton H Miller and Eugene F. Fama, both were recipients of Noble prize in economics.

After his PHD, he joined University of Rochester, Simon School of Business as finance faculty in 1967. He remained there till 1988. At Simon, he founded Journal of Financial Economics, one of the leading scholarly finance journals. His 1976 Journal of Financial Economics (JFE) paper with William Meckling, Simon Business School Dean, “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure” is a seminal piece (340,000 citations on Google scholar). It set the bar for the extensive literature on agency theory.

He joined Harvard Business School in 1985 and taught “Organizational Structure and Agency Theory” there till 2000. While at HBS, he was the most powerful faculty member. After Harvard, he joined Monitor Group, a consulting firm, in 2000. He co-founded SSRN, an online portal, to have social science research articles at one place.

He was popular for Jensen’s Alpha, an excess return on investment portfolio.

His works shaped our understanding of institutional economics, corporate finance, and the theories of the firm and managerial behaviour. Jensen’s pioneering contributions, including his seminal work on agency theory, have not only advanced academic thought but also profoundly influenced practical approaches in business and finance worldwide. His research contributions put him in the highest echelons of academic finance and economics. Prof. Jensen was also nominated for Noble prize in economics.

His untimely death is immense loss to the finance fraternity. He left many creative ideas and innovative thinking for the students, researchers and practitioners of finance.

It was my privilege to be one of his students during his Leadership Training and Seminar at Simon Business School, University of Rochester.

I pay my sincere homage to Prof. Jensen. He was truly a beloved person. He and his works remain with us for forever.