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NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Mutual Funds

Caselet: A fund has delivered an annual return of 14% with a standard deviation of 10% and a beta of 0.8. The risk-free rate is 6%, and the market return is 12%. Based on the CAPM, what is the fund's alpha (Jensen's alpha)?

Jensen's alpha is +3.2 percent. The CAPM expected return is 6% plus 0.8 times the 6% market premium, which equals 10.8%. The fund actually returned 14%, so it outperformed the risk-adjusted expectation by 3.2 percentage points.

  1. A+1.2%
  2. B+2.0%
  3. C+3.2%Correct
  4. D-1.2%

Explanation

Expected return under CAPM = 6 + 0.8 x (12 - 6) = 6 + 4.8 = 10.8%. Alpha = actual - expected = 14 - 10.8 = +3.2%. Option +2.0% results from using the market return without beta (14 - 12). Option +1.2% and -1.2% come from arithmetic or sign errors.

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