Portfolio Management Q121

0. 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:

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Option : B
Explanation : 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%.

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