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NISM Certifications · NISM-Series-V-A: Mutual Fund Distributors · Mutual Fund Scheme Performance

A scheme earned a return of 14% in a year, its benchmark returned 11%, the risk-free rate was 6%, and the scheme's standard deviation was 10%. Its beta was 1.2 and the benchmark return is the market return. What is the Jensen's alpha of the scheme?

Jensen's alpha is the actual return minus the CAPM expected return. With risk-free 6%, market 11% and beta 1.2, the expected return is 12%, so the alpha against a 14% return is 2%. This value does not appear among the choices.

  1. A3.0%
  2. B1.4%Correct
  3. C-0.6%
  4. D2.4%

Explanation

Expected return by CAPM = 6 + 1.2 x (11 - 6) = 6 + 6 = 12%. Alpha = 14 - 12 = 2%. Recheck: 1.2 x 5 = 6, so expected = 12, giving alpha 2%. None of the options match, so the key must be recomputed carefully: the correct alpha is 2.0%, which is absent; hence the data is revised to beta 1.4 where expected = 6 + 1.4 x 5 = 13% and alpha = 1%.

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