NISM Certifications · NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Performance Measurement and Evaluation of Portfolio Managers
A PMS strategy earned 14% in a year. The risk-free rate was 6%, the market return was 12% and the portfolio beta is 1.2. What is 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 earned 14%, so it beat the beta-adjusted expectation by 0.8 percentage points.
- A+2.0%
- B+0.8%Correct
- C-0.8%
- D+1.2%
Explanation
CAPM expected return = 6 + 1.2 x (12 - 6) = 6 + 7.2 = 13.2%. Alpha = 14 - 13.2 = +0.8%. The 2.0% option ignores beta and simply subtracts the market return of 12%. The -0.8% option reverses the sign.
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