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NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Portfolio Performance Measurement and Evaluation

Rohit's Fund A has return 15%, beta 1.25. Risk-free rate is 7% and market return is 13%. What is Jensen's alpha for Fund A, and how should it be read?

Jensen's alpha is +0.5%. The CAPM-required return is 7% plus 1.25 times the 6% market premium, which is 14.5%. The fund returned 15%, so it outperformed what its beta justified. Comparing against the market return alone ignores risk.

  1. A+0.5%; the fund outperformed its CAPM-required returnCorrect
  2. B-0.5%; the fund underperformed its CAPM-required return
  3. C+2.0%; the fund outperformed the market return
  4. D+0.5%; the fund merely matched the market

Explanation

CAPM expected return = 7 + 1.25 × (13 − 7) = 14.5%. Alpha = 15 − 14.5 = +0.5%. Positive alpha means the fund beat the return required for its systematic risk. Comparing with the market return of 13% (giving 2%) ignores beta.

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