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NISM Certifications · NISM-Series-V-A: Mutual Fund Distributors · Mutual Fund Scheme Selection

A fund has a beta of 1.2 relative to its benchmark. The risk-free rate is 6%, and the benchmark return is 12%. The fund returned 14%. Using Jensen's alpha, what conclusion is correct?

Alpha is +0.8%, meaning the fund outperformed. The CAPM expected return is 6% plus 1.2 times the 6% market premium, which equals 13.2%. The fund's actual 14% exceeds this by 0.8 percentage points, showing positive risk-adjusted outperformance.

  1. AAlpha is +0.8%, so the fund outperformed its risk-adjusted expectationCorrect
  2. BAlpha is +2%, so the fund outperformed by the full excess over the benchmark
  3. CAlpha is -0.8%, so the fund underperformed
  4. DAlpha is 0%, so the fund earned exactly the expected return

Explanation

Expected return = 6 + 1.2 x (12 - 6) = 13.2%. Alpha = 14 - 13.2 = +0.8%. Using 2% ignores beta and just subtracts the benchmark return. A negative alpha would arise only if expected return exceeded 14%.

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