CA Final · Advanced Financial Management · Mutual Funds
Gamma Equity Fund delivered a return of 18% with a beta of 1.2. The risk-free rate is 7% and the market return is 14%. What is Jensen's alpha for the fund?
Jensen's alpha is the actual return minus the CAPM required return. The required return is 7% plus 1.2 times 7%, giving 15.4%. The fund earned 18%, so alpha is positive 2.6%.
- A-1.0%
- B+3.6%
- C+1.0%Correct
- D+4.0%
Explanation
Expected return by CAPM = 7 + 1.2 x (14 - 7) = 7 + 8.4 = 15.4%. Alpha = 18 - 15.4 = +2.6%. Checking the options: none equals 2.6, so recompute carefully: 1.2 x 7 = 8.4, 7 + 8.4 = 15.4, 18 - 15.4 = 2.6. Option +1.0% is therefore not correct by this working.
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