NISM Certifications · NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Portfolio Management Process
A portfolio has a beta of 1.2, the risk-free rate is 6% and the market return is 11%. The portfolio actually returned 13%. Using CAPM, what is the portfolio's alpha (Jensen's alpha)?
The alpha is 1.0%. CAPM expected return is 6% plus 1.2 times the 5% market premium, which is 12%. The portfolio earned 13%, so it beat the risk-adjusted expectation by 1 percentage point, indicating positive manager value addition.
- A1.0%Correct
- B2.0%
- C-1.0%
- D7.0%
Explanation
Expected return = 6 + 1.2 x (11 - 6) = 6 + 6 = 12%. Alpha = actual 13% - expected 12% = 1.0%. The 2.0% figure results from using beta of 1 and so comparing 13 with 11. The -1.0% is a sign error. The 7.0% is simply return minus risk-free rate (13-6), which ignores beta.
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