CMA Final · Strategic Financial Management · Portfolio Performance Evaluation and Portfolio Revision
The risk-free rate is 6% and the expected market return is 13%. A portfolio with a beta of 1.2 delivered an actual return of 16%. What is Jensen's alpha for the portfolio?
Jensen's alpha is +1.6%. The CAPM required return is 6% + 1.2 x 7% = 14.4%, and the portfolio earned 16%, so it beat the required return by 1.6 percentage points. This is positive risk-adjusted outperformance.
- A+1.6%Correct
- B+3.0%
- C-1.6%
- D+10.0%
Explanation
Required return under CAPM = 6 + 1.2 x (13 - 6) = 14.4%. Alpha = 16 - 14.4 = +1.6%. The value +3.0% is 16 - 13, which ignores beta. The value -1.6% reverses the sign. The value +10.0% is 16 - 6, which does not adjust for beta risk.
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