NISM Certifications · NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Performance Measurement and Evaluation of Portfolio Managers
A PMS portfolio has a beta of 1.2. The risk-free rate is 6% and the market return is 12%. If the portfolio returned 14%, what is its Jensen's alpha?
Jensen's alpha is +0.8%. The CAPM required return is 6% plus 1.2 times the 6% market premium, which equals 13.2%. The portfolio's actual 14% return exceeds this by 0.8 percentage points.
- A+2.0%
- B+0.8%Correct
- C−0.8%
- D+8.0%
Explanation
Expected return by CAPM = 6 + 1.2 × (12 − 6) = 13.2%. Alpha = 14 − 13.2 = +0.8%. Using the market return of 12% as the benchmark gives +2.0%, ignoring beta, which is wrong.
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