CMA Final · Strategic Financial Management · Portfolio Performance Evaluation and Portfolio Revision
A portfolio with beta 1.2 earned 16%. The risk-free rate is 7% and the market return is 13%. Using CAPM, what is Jensen's alpha for the portfolio?
Jensen's alpha is 1.8%. CAPM gives an expected return of 7% plus 1.2 times the 6% market premium, which is 14.2%. The actual return of 16% exceeds this by 1.8%, showing positive risk-adjusted outperformance by the manager.
- A1.8%Correct
- B3.0%
- C0.4%
- D9.0%
Explanation
Required return = 7 + 1.2 x (13 - 7) = 14.2%. Alpha = 16 - 14.2 = 1.8%. The 0.4% option wrongly computes expected return as 1.2 x 13 = 15.6%, and the 3.0% option compares with the market return without beta adjustment.
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