CMA Final · Strategic Financial Management · Portfolio Performance Evaluation and Portfolio Revision
Fund Kaveri earned 15% in a year with a beta of 1.2. The risk-free rate was 7% and the market return was 13%. What is Jensen's alpha for the fund?
Jensen's alpha is +0.8%. CAPM gives a required return of 7% + 1.2 x 6% = 14.2%. The fund earned 15%, so it beat the risk-adjusted benchmark by 0.8 percentage points, showing positive outperformance after adjusting for systematic risk.
- A+0.8%Correct
- B-0.8%
- C+2.0%
- D+1.0%
Explanation
Required return by CAPM = 7 + 1.2 x (13 - 7) = 7 + 7.2 = 14.2%. Alpha = actual - required = 15 - 14.2 = +0.8%. The option +2.0% results from ignoring beta (15 - 13). The option -0.8% reverses the sign.
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