FRM Part I · FRM Exam Part I · Fund Management
A fund returned 11% over the year. Its beta against the market is 1.2, the market returned 9%, and the risk-free rate is 3%. Using the CAPM, what is the fund's Jensen's alpha?
Jensen's alpha is 0.8%. The CAPM expected return is 3% plus 1.2 times the 6% market premium, or 10.2%. The fund's actual 11% return exceeds this by 0.8 percentage points.
- A0.8%Correct
- B2.0%
- C-2.8%
- D1.4%
Explanation
The CAPM expected return is 3% + 1.2 x (9% - 3%) = 10.2%. Alpha = 11% - 10.2% = 0.8%. Subtracting the market return (11 - 9) gives 2.0%, which ignores beta and the risk-free rate.
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