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NISM Certifications · NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Performance Measurement and Evaluation of Portfolio Managers

A PMS portfolio returned 16% with a beta of 1.2. The risk-free rate is 6% and the market return is 14%. What is Jensen's alpha?

Jensen's alpha is 0.4%. The CAPM-required return is 6% + 1.2 x 8% = 15.6%, and the portfolio's actual return of 16% exceeds it by 0.4%, showing a small positive risk-adjusted outperformance by the manager.

  1. A0.4%Correct
  2. B2.0%
  3. C-0.4%
  4. D10.0%

Explanation

Expected return under CAPM = 6 + 1.2 x (14 - 6) = 6 + 9.6 = 15.6%. Alpha = 16 - 15.6 = 0.4%. The 2.0% option wrongly compares the return with the market return (16 - 14). The -0.4% option reverses the sign, and the 10% option is only the excess return over the risk-free rate (16 - 6).

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