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

A portfolio has a beta of 1.2, the risk-free rate is 6% and the market return is 11%. The portfolio earned 13%. What is its Jensen's alpha?

Jensen's alpha is actual return minus the CAPM-required return. The required return is 6% + 1.2 x 5% = 12%. The portfolio earned 13%, so alpha is +1.0%, showing positive risk-adjusted outperformance.

  1. A+1.0%Correct
  2. B+2.0%
  3. C-1.0%
  4. D+7.0%

Explanation

Expected return by CAPM = 6 + 1.2 x (11 - 6) = 12%. Alpha = actual 13% - expected 12% = +1.0%. +2.0% would result from ignoring beta, and +7.0% is just the excess over the risk-free rate.

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