NISM Certifications · NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Performance Measurement and Evaluation of Portfolio Managers
A portfolio returned 18% with a beta of 1.2. The risk-free rate is 6% and the market return is 14%. What is the Jensen's alpha of the portfolio?
Jensen's alpha is 2.4%. The CAPM expected return is 6% plus 1.2 times the 8% market premium, which is 15.6%. The portfolio actually earned 18%, so the excess over the risk-adjusted expected return is 2.4%.
- A2.4%Correct
- B4%
- C3.6%
- D1.2%
Explanation
Expected return by CAPM = 6 + 1.2 x (14 - 6) = 6 + 9.6 = 15.6%. Alpha = 18 - 15.6 = 2.4%. The 4% figure compares with the market return without adjusting for beta.
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