FRM Part II · FRM Exam Part II · The Investment Function in Financial Services Management
A bank's investment portfolio has a beginning market value of 200 million. During the year it earned a total return of 9.0%. The risk-free rate was 3.0%, the portfolio beta against the benchmark market was 1.2, and the market return was 8.0%. What is the portfolio's Jensen's alpha?
Jensen's alpha is 0.0%. The CAPM-required return is 3% plus 1.2 times the 5% market premium, which is 9%. The portfolio earned exactly 9%, so it generated no return above what its systematic risk required.
- A0.0%
- B1.0%Correct
- C2.0%
- D6.0%
Explanation
Expected return under CAPM = 3.0% + 1.2 x (8.0% - 3.0%) = 9.0%. Hmm, this equals the actual return, so recompute: 3.0% + 1.2 x 5.0% = 9.0%, giving alpha = 9.0% - 9.0% = 0.0%. The correct choice is therefore 0.0%.
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