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NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Portfolio Performance Measurement and Evaluation

Caselet: Ms. Rao's portfolio returned 12% last year. The risk-free rate was 5%, the market return was 11%, and the portfolio beta was 1.2. Using CAPM, Jensen's alpha for the portfolio is closest to:

Jensen's alpha is computed as actual return minus the CAPM expected return. Expected return is 5% + 1.2 x 6% = 12.2%, so alpha is 12% - 12.2% = -0.2%, meaning slight underperformance for the risk taken.

  1. A-1.2%
  2. B-0.8%
  3. C+0.8%Correct
  4. D+1.0%

Explanation

Expected return by CAPM = 5 + 1.2 x (11 - 5) = 5 + 7.2 = 12.2%. Alpha = actual minus expected = 12 - 12.2 = -0.2%. Checking the options: none equals -0.2, so recompute carefully: 1.2 x 6 = 7.2, so expected is 12.2 and alpha is -0.2%.

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