NISM Certifications · NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Performance Measurement and Evaluation of Portfolio Managers
A PMS portfolio earned 16% with a beta of 1.2. The risk-free rate is 7% and the market return is 13%. What is the Jensen's alpha of the portfolio?
Jensen's alpha is 1.8%. The CAPM required return is 7% plus 1.2 times the 6% market premium, giving 14.2%. The portfolio earned 16%, so it outperformed the risk-adjusted expectation by 1.8 percentage points.
- A1.8%Correct
- B3.0%
- C0.0%
- D-1.2%
Explanation
Expected return by CAPM = 7 + 1.2 x (13 - 7) = 7 + 7.2 = 14.2%. Alpha = 16 - 14.2 = 1.8%. The 3.0% option ignores beta and simply takes 16 - 13. The -1.2% option has the wrong sign and uses the wrong figures.
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