FRM Part II · FRM Exam Part II · Portfolio Performance Evaluation
Portfolio A earned 11% with a beta of 1.2. The risk-free rate is 3% and the market return was 9%. What is Portfolio A's Jensen's alpha?
Jensen's alpha is 0.8%. The CAPM-required return is 3% plus 1.2 times the 6% market premium, which is 10.2%. The portfolio's actual return of 11% exceeds this by 0.8 percentage points, showing positive risk-adjusted outperformance.
- A0.8%Correct
- B1.2%
- C-0.2%
- D2.0%
Explanation
Expected return under CAPM = 3% + 1.2 x (9% - 3%) = 10.2%. Alpha = 11% - 10.2% = 0.8%. Forgetting beta and using the market return gives 11% - 9% = 2.0%, which is wrong.
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