FRM Part II · FRM Exam Part II · Alpha (and the Low-Risk Anomaly)
A fund returned 12% in a year when the risk-free rate was 3% and the market return was 10%. The fund's beta is 1.2. Using the CAPM, what is the fund's Jensen's alpha?
Jensen's alpha is 0.6%. The CAPM expected return is 3% plus 1.2 times the 7% market premium, which is 11.4%. The fund earned 12%, so the excess over the beta-adjusted expected return is 0.6%.
- A0.6%Correct
- B1.2%
- C2.0%
- D3.6%
Explanation
Expected return = 3% + 1.2 × (10% − 3%) = 3% + 8.4% = 11.4%. Alpha = 12% − 11.4% = 0.6%. Using beta of 1 would give 12 − 10 = 2.0%, ignoring risk adjustment.
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