FRM Part II · FRM Exam Part II · Factors
A portfolio has an expected return of 9.5% and a beta of 1.25. The risk-free rate is 2% and the market's expected return is 7%. What is the portfolio's Jensen's alpha?
Jensen's alpha is +1.25%. The CAPM required return is 2% plus 1.25 times the 5% market premium, which is 8.25%. The portfolio's expected return of 9.5% exceeds this by 1.25 percentage points.
- A+1.25%Correct
- B−1.25%
- C+0.50%
- D+2.50%
Explanation
CAPM required return = 2% + 1.25 × 5% = 8.25%. Alpha = 9.5% − 8.25% = +1.25%. The −1.25% option reverses the sign. The 2.50% option wrongly uses beta of 1 on a different base.
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