CA Final · Advanced Financial Management · Mutual Funds
Kaveri Equity Fund returned 16% with a beta of 1.2. The risk-free rate is 6% and the market return is 13%. Using CAPM, what is Jensen's alpha for the fund?
Jensen's alpha is 1.6%. CAPM expected return is 6% plus 1.2 times the 7% market premium, which equals 14.4%. The fund's actual return of 16% exceeds this by 1.6 percentage points, showing positive risk-adjusted outperformance.
- A1.6%Correct
- B3.0%
- C-1.6%
- D10.0%
Explanation
Required return = 6 + 1.2 x (13 - 6) = 14.4%. Alpha = 16 - 14.4 = 1.6%. Option 3.0% is 16 - 13, comparing to market return without beta adjustment. Option -1.6% has the sign reversed.
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