NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Portfolio Performance Measurement and Evaluation
Portfolio A has a return of 12%, beta of 0.9 and the risk-free rate is 5%. The market return is 11%. Using CAPM, what is Jensen's alpha for Portfolio A?
Jensen's alpha is actual return minus the CAPM expected return. Expected return is 5% plus 0.9 times the 6% market premium, giving 10.4%. The portfolio earned 12%, so alpha is positive 1.6%, indicating the manager added value beyond what its systematic risk required.
- A1.6%Correct
- B7.0%
- C-1.6%
- D0.6%
Explanation
Expected return = 5% + 0.9 x (11% - 5%) = 5% + 5.4% = 10.4%. Alpha = actual - expected = 12% - 10.4% = 1.6%. Check: 10.4 + 1.6 = 12. The -1.6% option reverses the sign. The 7.0% option is excess return over the risk-free rate with no beta adjustment. The 0.6% option uses market premium beta incorrectly.
Did you get it right without looking?
One question tells you little. A timed set on Portfolio Performance Measurement and Evaluation shows your real accuracy, how long you take and where you lose marks.
More Portfolio Performance Measurement and Evaluation questions
- A portfolio returned 12% while its benchmark returned 9%. The tracking error (standard deviation of active returns) was 4%. What is the info…
- A portfolio earned 14% in a year when the risk-free rate was 6%. Its standard deviation was 16% and beta was 1.25. What is its Treynor ratio…
- A portfolio manager's portfolio returned 14% in a year. The risk-free rate was 6%, and the portfolio's standard deviation was 16%. What is t…
- A portfolio managed for Mr. Iyer earned an average return of 14% with a standard deviation of 20%. The risk-free rate is 6% and the portfoli…
- In performance measurement, the 'time-weighted rate of return' (TWRR) is preferred for evaluating a portfolio manager mainly because it:
- In performance measurement, the Treynor ratio of a portfolio is calculated as the excess return over the risk-free rate divided by which mea…