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 15%, a beta of 1.25, and the risk-free rate is 7%. The market return is 13%. What is the Jensen's alpha of the portfolio?
Jensen's alpha is 0.5%. The CAPM required return is 7% plus 1.25 times the 6% market premium, giving 14.5%. The portfolio earned 15%, so it beat the required return by 0.5 percentage points.
- A0.5%Correct
- B2%
- C-0.5%
- D1.5%
Explanation
Expected return by CAPM = 7 + 1.25 x (13 - 7) = 7 + 7.5 = 14.5%. Alpha = 15 - 14.5 = 0.5%. Option 2% results from using beta of 1 (expected 13%). Option -0.5% reverses the sign of the difference.
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