CMA Final · Strategic Financial Management · Portfolio Performance Evaluation and Portfolio Revision
A portfolio returned 15% in a year. The risk-free rate was 7%, the market return was 13% and the portfolio beta was 1.2. What is Jensen's alpha for the portfolio?
Jensen's alpha is 0.8%. The CAPM required return is 7% + 1.2 x (13% - 7%) = 14.2%. The portfolio actually earned 15%, so it outperformed its beta-adjusted expectation by 0.8 percentage points, indicating positive manager skill.
- A0.8%Correct
- B-0.8%
- C2.0%
- D1.4%
Explanation
Expected return by CAPM = 7 + 1.2 x (13 - 7) = 14.2%. Alpha = 15 - 14.2 = 0.8%. The 2.0% option simply subtracts the market return from the portfolio return, ignoring beta, and -0.8% reverses the sign.
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