NISM Certifications · NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Performance Measurement and Evaluation of Portfolio Managers
A portfolio has a return of 16%, a beta of 1.25 and the risk-free rate is 6%. The market return is 14%. Using CAPM to find the expected return, what is the portfolio's Jensen's alpha?
Jensen's alpha is 0%. CAPM expected return is 6% plus 1.25 times the 8% market premium, which equals 16%. Since the portfolio actually earned 16%, there is no return above or below what its beta risk justified.
- A0%
- B-2%
- C2%Correct
- D10%
Explanation
Expected return = 6 + 1.25 x (14 - 6) = 6 + 10 = 16%. Alpha = actual - expected = 16 - 16 = 0%. Check: the portfolio's return equals CAPM's expectation, so alpha is zero. Wait, recompute for the stated data: actual 16%, expected 16%, so alpha is 0%. The correct option is therefore 0%.
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