FRM Part I · FRM Exam Part I · Fund Management
A hedge fund returned 12% over a year with a standard deviation of 10%, beta of 0.5 to the market, risk-free rate 2%, and market return 10%. What is the fund's Jensen's alpha?
Jensen's alpha is the actual return minus the CAPM expected return. With beta 0.5, expected return is 2% plus 0.5 times 8%, or 6%. The fund earned 12%, so alpha is 6%.
- A6.0%Correct
- B8.0%
- C2.0%
- D10.0%
Explanation
Expected return = 2% + 0.5 x (10% - 2%) = 6%. Alpha = 12% - 6% = 6%. Using the market premium without beta gives 4%, and ignoring the risk-free rate gives other wrong values.
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