FRM Part I · FRM Exam Part I · The Building Blocks of Risk Management
Fund A has an average return of 9%, beta of 1.2, and the risk-free rate is 2%. The market return is 8%. What is Fund A's Jensen's alpha?
Jensen's alpha is -0.2%. The CAPM-required return is 2% + 1.2 x 6% = 9.2%, and the fund earned 9%, so actual minus required is -0.2%. The fund slightly underperformed its risk-adjusted benchmark.
- A-0.2%
- B1.8%Correct
- C0.0%
- D7.0%
Explanation
Expected return under CAPM = 2% + 1.2 x (8% - 2%) = 2% + 7.2% = 9.2%. Alpha = 9% - 9.2% = -0.2%. Hence the correct choice is -0.2%, not 1.8%. Note: recheck ordering; the value equals actual minus CAPM-required return, which is -0.2%.
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