FRM Part I · FRM Exam Part I · Fund Management
A portfolio has an annual return of 12%, volatility of 10%, beta of 0.8 to the market and the risk-free rate is 3%. The market return is 10%. What is the portfolio's Jensen's alpha?
Jensen's alpha is 3.4%. The CAPM required return is 3% plus 0.8 times the 7% market premium, or 8.6%, and the portfolio earned 12%, so it outperformed the benchmark expectation by 3.4 percentage points.
- A3.4%Correct
- B2.0%
- C9.0%
- D5.4%
Explanation
Expected return under CAPM = 3% + 0.8 x (10% - 3%) = 8.6%. Alpha = 12% - 8.6% = 3.4%. The 5.4% option omits the risk-free rate from the expected return, and 9% is just the excess return.
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