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NISM Certifications · NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Performance Measurement and Evaluation of Portfolio Managers

Under the CAPM, the risk-free rate is 7%, the market return is 13% and a portfolio has beta 1.5. The portfolio actually returned 17%. What is Jensen's alpha?

Jensen's alpha is +1%. CAPM expects 16% given beta of 1.5, and the portfolio earned 17%, so the manager added one percentage point of return beyond what systematic risk would justify.

  1. A+1%Correct
  2. B+4%
  3. C-1%
  4. D+2%

Explanation

Expected return = 7% + 1.5 x (13% - 7%) = 7% + 9% = 16%. Alpha = actual 17% - expected 16% = +1%. Using +4% compares with the market return of 13%, ignoring beta. -1% reverses the sign. +2% uses beta incorrectly.

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