CFA Level I · CFA Level I Exam · Portfolio Risk and Return: Part II
Portfolio B earned 10% with a beta of 0.8. The risk-free rate is 2% and the market return is 9%. Jensen's alpha of Portfolio B is closest to:
Jensen's alpha is the actual return minus the CAPM-required return. The required return is 2% + 0.8 x 7% = 7.6%, so alpha is 10% - 7.6% = 2.4%. This shows the portfolio outperformed what its systematic risk would justify.
- A0.4%
- B2.4%Correct
- C8.0%
Explanation
Required return = 2% + 0.8 x (9% - 2%) = 7.6%. Alpha = 10% - 7.6% = 2.4%. The 0.4% figure results from using beta of 1 incorrectly with market premium misapplied (10 - 9.6), and 8.0% is the excess return over the risk-free rate, with no benchmark adjustment.
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