FRM Part II · FRM Exam Part II · Portfolio Performance Evaluation
A portfolio earned 10% with a beta of 0.8 against the market. The risk-free rate is 2% and the market return was 9%. What is the portfolio's Jensen's alpha?
Jensen's alpha is 2.4%. The CAPM-required return is 2% plus 0.8 times the 7% market premium, which is 7.6%. The portfolio earned 10%, so the excess over the beta-adjusted expected return is 2.4%.
- A2.4%Correct
- B0.4%
- C1.0%
- D8.0%
Explanation
Expected return under CAPM = 2% + 0.8 x (9% - 2%) = 7.6%. Alpha = 10% - 7.6% = 2.4%. Ignoring the beta and using 10% - 9% gives 1.0%, which is the wrong benchmark.
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