CFA Level I · CFA Level I Exam · The Capital Asset Pricing Model, Market Model, and Other Factor-Based Equity Models
A manager's portfolio has a positive Jensen's alpha estimated from a regression of excess portfolio returns on excess market returns. The alpha is most likely interpreted as the:
A positive Jensen's alpha is the return earned above the CAPM-required return for the portfolio's beta. It is the regression intercept. Beta is the slope measuring market sensitivity, and R-squared captures explained variation.
- Areturn in excess of the CAPM-required return for the portfolio's betaCorrect
- Bportfolio's sensitivity to market movements
- Cportion of total return explained by market movements
Explanation
The regression intercept is alpha, the return earned beyond what CAPM predicts given beta. Beta, the slope, measures market sensitivity, and R-squared measures the explained portion of variation.
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