NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Introduction to Modern Portfolio Theory
A portfolio has an expected return of 13%, standard deviation of 15% and beta of 1.2. The risk-free rate is 6% and the market return is 11%. What is the Jensen's alpha of the portfolio?
Jensen's alpha is positive 1.0%. The CAPM-required return is 6% plus 1.2 times 5%, equal to 12%, and the portfolio earned 13%. The excess of 1 percentage point over the beta-adjusted benchmark is the alpha.
- A1.0%Correct
- B-1.0%
- C0.0%
- D2.0%
Explanation
Required return = 6% + 1.2 x 5% = 12%. Alpha = 13% - 12% = 1.0%. The -1.0% option reverses the sign. The 2.0% option wrongly uses beta of 1 (11% required) and gets 2%... that ignores the portfolio beta.
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