CMA Final · Strategic Financial Management · Portfolio Performance Evaluation and Portfolio Revision
A portfolio manager's fund returned 15% with a beta of 1.2. The risk-free rate is 7% and the market return is 13%. Using the CAPM benchmark, what is Jensen's alpha for the fund?
Jensen's alpha is the actual return less the CAPM required return. The required return is 7% + 1.2 × 6% = 14.2%. The fund earned 15%, so alpha is +0.8%. This shows positive risk-adjusted outperformance by the manager.
- A+0.8%Correct
- B-0.8%
- C+2.0%
- D-0.6%
Explanation
Required return = 7 + 1.2 × (13 − 7) = 14.2%. Alpha = 15 − 14.2 = +0.8%. +2.0% compares with the market return and ignores beta. -0.8% reverses the sign. -0.6% uses 1.2 × 13 = 15.6% as the required return and forgets the risk-free adjustment.
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