NISM Certifications · NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Performance Measurement and Evaluation of Portfolio Managers
A PMS portfolio has a return of 14%, beta of 1.2 and the risk-free rate is 6%. The market return is 12%. What is Jensen's alpha?
Jensen's alpha is 0.8%. The CAPM expected return is 6% plus 1.2 times the 6% market premium, which equals 13.2%. The portfolio earned 14%, so it outperformed the risk-adjusted expectation by 0.8 percentage points.
- A0.8%Correct
- B2.0%
- C-0.8%
- D8.0%
Explanation
Expected return under CAPM = 6 + 1.2 x (12 - 6) = 13.2%. Alpha = 14 - 13.2 = 0.8%. Using beta of 1 gives expected 12% and alpha of 2%, ignoring beta. Reversing the subtraction gives -0.8%.
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