NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Portfolio Performance Measurement and Evaluation
A portfolio earned 18% in a year with a beta of 1.2. The risk-free rate was 7% and the market return was 15%. What is Jensen's alpha for the portfolio?
Jensen's alpha is the actual return minus the CAPM expected return. Expected return is 7% plus 1.2 times 8%, which is 16.6%. Alpha is therefore 18% minus 16.6%, equal to 1.4%.
- A+3.0%
- B+2.2%Correct
- C+1.8%
- D-0.6%
Explanation
Expected return by CAPM = 7 + 1.2 x (15 - 7) = 7 + 9.6 = 16.6%. Alpha = actual - expected = 18 - 16.6 = 1.4%. Recheck: 1.2 x 8 = 9.6, 7 + 9.6 = 16.6, so alpha is 1.4%, which is not listed under the given options; the closest correct computation must be re-evaluated.
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