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FRM Part II · FRM Exam Part II · Alpha (and the Low-Risk Anomaly)

A portfolio returned 11.0% over a year. The risk-free rate was 3.0%, the market return was 9.0%, and the portfolio's beta is 1.20. Using the CAPM as the benchmark, what is the portfolio's Jensen's alpha?

Jensen's alpha is the actual return minus the CAPM-required return. The required return is 3% plus 1.2 times the 6% market premium, or 10.2%. The portfolio earned 11.0%, so alpha is 0.8%. It is not measured against the raw market return.

  1. A0.8%Correct
  2. B2.0%
  3. C1.0%
  4. D-0.2%

Explanation

Expected return = 3% + 1.2 x (9% - 3%) = 3% + 7.2% = 10.2%. Alpha = 11.0% - 10.2% = 0.8%. Choosing 2.0% comes from comparing with the market return (11 - 9) and ignoring beta and the risk-free rate.

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