What are the limitations of using Jensen’s alpha to evaluate the returns of digital currencies?

3 answers

• Lahari MannamDec 08, 2021 · 4 years ago
  Jensen's alpha is a widely used measure to evaluate the risk-adjusted performance of investment portfolios, including digital currencies. However, when it comes to digital currencies, there are several limitations to consider. Firstly, Jensen's alpha assumes a linear relationship between risk and return, which may not hold true for highly volatile and unpredictable digital currencies. Secondly, Jensen's alpha relies on the accuracy of the chosen benchmark index, and finding a suitable benchmark for digital currencies can be challenging due to their unique characteristics. Additionally, Jensen's alpha does not account for the specific risks associated with digital currencies, such as regulatory changes, security breaches, and market manipulation. Therefore, while Jensen's alpha can provide some insights into the performance of digital currencies, it should be used in conjunction with other evaluation methods and considering the unique risks and characteristics of the digital currency market.
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• Sanaz AlipoorJul 05, 2025 · 15 days ago
  Using Jensen's alpha to evaluate the returns of digital currencies has its limitations. One of the main drawbacks is that Jensen's alpha assumes a normal distribution of returns, which may not hold true for digital currencies that often exhibit extreme price movements and non-normal distributions. Another limitation is that Jensen's alpha does not consider the impact of transaction costs, which can be significant in the digital currency market due to high volatility and liquidity issues. Additionally, Jensen's alpha does not account for the potential risks associated with digital currencies, such as regulatory changes, technological advancements, and market sentiment. Therefore, while Jensen's alpha can provide a useful measure of risk-adjusted performance, it should be used in conjunction with other evaluation tools and considering the unique characteristics of digital currencies.
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• Patel GrishmaDec 10, 2024 · 7 months ago
  When it comes to evaluating the returns of digital currencies, using Jensen's alpha has its limitations. Jensen's alpha is a measure of risk-adjusted performance that compares the actual returns of an investment portfolio with the expected returns based on a benchmark index. However, there are several factors that make Jensen's alpha less suitable for evaluating digital currencies. Firstly, digital currencies are highly volatile and can experience extreme price fluctuations, which may not be accurately captured by Jensen's alpha. Secondly, digital currencies are not directly comparable to traditional assets, and finding an appropriate benchmark index can be challenging. Additionally, Jensen's alpha does not account for the unique risks associated with digital currencies, such as regulatory changes, technological advancements, and market sentiment. Therefore, while Jensen's alpha can provide some insights into the performance of digital currencies, it should be used cautiously and in conjunction with other evaluation methods that consider the specific characteristics and risks of the digital currency market.
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