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. Moreover, an investor should also look at the return a fund has generated compared to the risk involved. This is because investors need to be aware of a properly calculated measure of total return from an investment against the inherent risks involved.

4 Best Choices

Also known as the Jensen's Performance Index, Jensen’s alpha 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 five-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: Mutual Funds: Advantages, Disadvantages, and How They Make Investors Money).

AB Large Cap Growth Fund Class A (APGAX Quick QuoteAPGAX - Free Report) aims for long-term capital appreciation. The fund invests the majority of its assets in securities of large-capitalization domestic companies that the fund's adviser carefully selects for their growth potential.

This Sector- Large Cap Growth product has a history of positive total returns for more than 10 years. To see how this fund performed compared in its category, and other 1 and 2 Ranked Mutual Funds, please click here.

APGAX has a Zacks Mutual Fund Rank #1 and an annual expense ratio of 0.89%, which is below the category average of 1.05%. The fund has three and five-year returns of 19.5% and 16%, respectively. APGAXhad an alpha of 8.96 in the last three years.

AB Discovery Growth Fund Class A (CHCLX Quick QuoteCHCLX - Free Report) seeks to achieve long-term growth of capital. The fund invests in a diversified portfolio of equity securities, which are of relatively smaller capitalization companies as compared to the overall U.S. market.The fund invests the lion’s share of its assets in small- and mid-capitalization companies.

This Sector-Health product has a history of positive total returns for over 10 years. To see how this fund performed compared in its category, and other 1 and 2 Ranked Mutual Funds, please click here.

CHCLX has a Zacks Mutual Fund Rank #1 and an annual expense ratio of 0.95%, which is below the category average of 1.16%. The fund has three and five-year returns of 17.9% and 12.5%, respectively. CHCLXhad an alpha of 5.58 in the last three years.

Goldman Sachs Large Cap Growth Insights Fund Investor Class (GLCTX Quick QuoteGLCTX - Free Report) maintains a diversified portfolio of equity investments by investing heavily in large-cap domestic companies, including foreign companies that are traded in the United States. GLCTX seeks long-term growth of capital and dividend income.

This Sector- Large Cap Growth product has a history of positive total returns for more than 10 years. To see how this fund performed compared in its category, and other 1 and 2 Ranked Mutual Funds, please click here.

GLCTX has a Zacks Mutual Fund Rank #2 and an annual expense ratio of 0.66%, which is below the category average of 1.05%. The fund has three and one-year returns of 15.2% and 13.6%, respectively. GLCTX had an alpha of 3.63 in the last three years.

Fidelity Advisor Series Growth Opportunities Fund (FAOFX Quick QuoteFAOFX - Free Report) seeks growth of capital by investing primarily in common stocks. The fund invests in securities of only those companies which the Fidelity Management & Research Company (FMR) believes have above-average growth potential. FAOFX invests in securities of both U.S. as well as non-U.S.-based companies.

This Sector- Large Cap Growth product has a history of positive total returns for more than 10 years. To see how this fund performed compared in its category, and other 1 and 2 Ranked Mutual Funds, please click here.

FAOFX has a Zacks Mutual Fund Rank #1 and an annual expense ratio of 0.01%, which is below the category average of 1.05%. The fund has three and five-year returns of 31.3% and 22.3%, respectively. FAOFX had an alpha of 18.19 in the last three years.

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