PRESENTER:

Maria Ilyas Ghumman MBA(1.5) 2nd

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FINANCE GURU

Micheal C. Jensen
November 30, 1939 (age72)

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Click to edit Master subtitle style Michael C. Jensen

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Early Life Of Guru:

Michael Jensen was born on November 30, 1939 in Rochester, Minnesota, United States. Education: He received his A.B. in Economics from Macalester College in 1962. He received both his M.B.A. (1964) and Ph.D. (1968) degrees from the University of Chicago Booth School of Business,
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INSTITUTIONS:

Between 1967-1988, Jensen was a professor of finance and business administration at the William E. Simon Graduate School of Business Administration of the University of Rochester. In 1992 he held the chair of president of the American Finance Association, he became a member of the American Academy of Arts and Sciences in 1996 and, since 2002, he is a board member of 5/25/12 European Corporate Governance the

Research Interest:

Professor Jensen's major research interests now include

1. "The Ontological Laws of Human Nature", 2. "A Positive Theory of the Normative Virtues", 3. "Being A Leader and the Effective Exercise of Leadership: An Ontological Approach",
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4. "The Three Foundations of a Great Personal Life, Great Leadership and a Great Company: Integrity, Authenticity, and Committed to Something Bigger than Oneself".

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BOOKS WRITTEN:
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1. Theory Of The Firm: Governance, Residual Claim and Organization Forms 2. Foundations Of Organizational Strategy. 3. The Modern theory Of Corporate Finance. 4. Democracy In Crisis. 5. Studies In Theory Of Capital Market. 5/25/12

Awards:
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May, 2011:

Awarded the 2011 Economics for Management Lecture Series ISES-Fundacion BBVA Prize.

2009:

The Morgan Stanley-AFA 2009 Award For Excellence in Financial Economics.

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In May 2009 :

He was awarded for Outstanding Academic Contributionsto Corporate Governance.

2007:

award for outstanding contributions to business research.

In March 2006:

Dean's Leadership Award in Corporate Governance.

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2004 :

His paper, The Agency Cost of Overvalued Equity and the Current State of Corporate Finance received the European Financial Management 2004 Readers Choice Best Paper Award.

2002:

He was named a Fellow of the European Corporate Governance Institute (ECGI). Besides these, there are several others awards gained by Micheal C. jensen
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Jensen is also the founder and editor of the Journal of Financial Economics. The Jensen Prize in corporate finance and organizations research is named in his honor. Prof. Jensen has played an important role in the academic discussion of the
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1.capital asset pricing model, of

jensens Model: CAPM

Jensen's model proposes risk adjusted performance measure. This measure referred to as the Differential return Method. It involves evaluation of the returns that the fund has generated vs. the returns actually expected out of the fund given the level of its systematic risk.

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Equation: Required return of a fund at a given level of risk (Bi) can be calculated as:

Ri = Rf + Bi (Rm - Rf)
where Ri= Return on Fund
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Rf= Risk free rate

The surplus between the two returns is called alpha, which measures the performance of a fund compared with the actual returns over the period taken as benchmark index.

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Jensen's alpha was first used as a measure in the evaluation of mutual fund managers by Micheal jensen in 1968. The CAPM return is supposed to be 'risk adjusted', which means it takes account of the relative riskiness of the asset. After all, riskier assets will have higher expected returns than less risky assets. 5/25/12

A risk-adjusted performance measure thatrepresents the average return on a portfolio over and above that predicted by the capital asset pricing model (CAPM), given the portfolio's beta and the average market return. This is the portfolio's alpha. In fact, the concept is sometimesreferred toas "Jensen's alpha.
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Equation:
Ri = Rf + Bi (Rm - Rf) Ri = Rf + Bi (Rm - Rf)

+p And

p = Rp- {Rf + Bi (Rm - Rf)} 5/25/12

Higher the value of alpha represents superior performance of the fund and lower alphas value presents inferior performance. In finance, Jensen's alpha (or Jensen's Performance Index, ) is used to determine the abnormal return of a security or portfolio of securities over the theoretical expected return. 5/25/12

The basic idea is that to analyze the performance of an investment manager you must look not only at the overall return of a portfolio, but also at the risk of that portfolio. For example, if there are two mutual funds that both have a 12% return, a rational investor will want the fund that is less risky.
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Jensen's measure is one of the ways to help determine if a portfolio is earning the proper return for its level of risk. If the value is positive, then the portfolio is earning excess returns. In other words, a positive value for Jensen's alpha means a fund manager has "beat the market" with his or her stock picking skills.
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Limitation:
Limitation of this model is that it considers only systematic risk not the entire risk associated with the fund and an ordinary investor can not mitigate unsystematic risk, as his knowledge of market is primitive

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Related Definations:

Alpha:

A measure of performance on a risk-adjusted basis. Alpha takes the volatility (price risk) of a mutual fund and compares its risk-adjusted performance to a benchmark index

Beta:

A measure of the volatility, or systematic risk, of a security or a 5/25/12 portfolio in comparison to the market

Capital Asset pricing Model:

A model that describes the relationship between risk and expected return and that is used in the pricing of risky securities.

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