NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Portfolio Performance Measurement and Evaluation
Mr. Iyer's portfolio returned 12% with a beta of 1.2. The risk-free rate is 5% and the market return is 10%. What is the Jensen's alpha of the portfolio?
Jensen's alpha is +1.0%. The CAPM-required return is 5% plus 1.2 times the 5% market premium, giving 11%. The portfolio actually earned 12%, so it outperformed its risk-adjusted benchmark by 1 percentage point.
- A+1.0%Correct
- B-1.0%
- C+2.0%
- D0.0%
Explanation
Expected return by CAPM = 5 + 1.2 x (10 - 5) = 11%. Alpha = actual 12% - expected 11% = +1.0%. The option -1.0% reverses the subtraction, and +2.0% wrongly uses beta of 1.0 on the market premium incorrectly by comparing with 10%.
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