NISM Certifications · NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Performance Measurement and Evaluation of Portfolio Managers
A PMS portfolio returned 15% with a beta of 1.2. The risk-free rate is 7% and the market return is 12%. What is the Jensen's alpha?
Jensen's alpha is 2.0%. The CAPM expected return is 7% + 1.2 x 5% = 13%, and the portfolio actually earned 15%, so it beat the risk-adjusted expectation by 2 percentage points.
- A2.0%Correct
- B3.0%
- C-2.0%
- D8.0%
Explanation
Expected return under CAPM = 7 + 1.2 x (12 - 7) = 7 + 6 = 13%. Jensen's alpha = actual 15% - expected 13% = 2.0%. The 3.0% option compares the return with the market return of 12% and ignores beta. The -2.0% option reverses the sign.
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