CA Final · Advanced Financial Management · Mutual Funds
A fund returned 18% in a year with a beta of 1.2. The risk-free rate is 7% and the expected market return is 14%. What is Jensen's alpha for the fund?
Jensen's alpha is +2.6%. The CAPM expected return is 7% plus 1.2 times the 7% market premium, which gives 15.4%. The fund actually earned 18%, so it beat the risk-adjusted expectation by 2.6 percentage points.
- A+2.6%Correct
- B-1.6%
- C+4.0%
- D+1.4%
Explanation
Required return by CAPM = 7 + 1.2 x (14 - 7) = 15.4%. Alpha = 18 - 15.4 = +2.6%. The option +4.0% comes from using beta of 1 (18 - 14), ignoring the fund's risk level.
Did you get it right without looking?
One question tells you little. A timed set on Mutual Funds shows your real accuracy, how long you take and where you lose marks.
More Mutual Funds questions
- Kavita invests Rs 12,00,000 in a liquid fund at NAV Rs 100 and starts an STP transferring Rs 2,00,000 monthly into an equity fund. Equity fu…
- Arvind holds 10,000 units of a debt fund at NAV Rs 50. He sets up a monthly SWP of Rs 10,000. At the end of month 1 the NAV is Rs 50 and at …
- Mr. Deshmukh invests Rs 1,02,000 in a scheme whose NAV is Rs 20.00 per unit and which charges a 2% entry load on NAV. He is allotted units o…
- Which statement about the Sharpe and Treynor measures for evaluating mutual fund schemes is correct?
- Equity scheme Alpha reported a return of 14%, with a beta of 0.8 and a standard deviation of 15%. The risk-free rate is 6%. Using the Treyno…
- Two schemes are compared over the same period with a risk-free rate of 5%. Scheme P: return 17%, standard deviation 15%, beta 0.9. Scheme Q:…