Portfolio Management MCQ - Portfolio Management Section 2

1 Last year, a portfolio manager earned a return of 10%. The portfolio’s beta was 0.5. For the same period, the market return was 7% and the average risk-free rate was 4%. Jensen’s alpha for this portfolio is closest to:

Jensen’s alpha = return that was actually achieved – expected return based on CAPM = 0.10 – [0.04 + 0.5 (0.07 – 0.04)] = 0.045 or 4.5%.

2 An investment manager has the following information regarding his portfolio’s return and volatility as compared to the market:

	Return	Risk
Market	9.50%	17.50%
Portfolio	15.50%	23.20%

Given that the risk free rate is 3.50%, M2 would be closest

M2 = (Rp − Rf) ∗ ( σm ) − (Rm − Rf)

3 George, a portfolio manager, aims to maximize risk-adjusted returns. He is most likely to invest in securities with a Jensen’s alpha of:

Since George aims to maximize risk-adjusted returns, securities with a higher Jensen’s alpha should have a greater weight in the portfolio.

4 Which of the following adjusts for total risk?

M-squared and Sharpe ratio adjust for total risk, whereas Jensen’s alpha adjusts for systematic risk.

5 Carlos wants to evaluate the performance of his portfolio manager. He wants to use a measure based on systematic risk and one which does not require a comparison to determine whether the performance is good or not. Which of the following measures is he most likely to use?

Jensen’s alpha is based on systematic risk and does not require a comparison. M-squared is based on total risk (not systematic risk). The Treynor ratio is based on systematic risk but requires a comparison.