Question

If the return on portfolio A is 13%, the market portfolio return is 8%, the inflation rate is 4%, the risk-free rate is 5%, the standard deviation of the return for portfolio A is 8% and the standard deviation of the return on the market portfolio is 14%, and the portfolio A’s beta is 0.8, the Jensen’s alpha for market portfolio will be 5.60%.

• A. True
• B. False

If the return on portfolio A is 6%, the market portfolio return is 10%, the inflation rate is 1%, the risk-free rate is 3%, the standard deviation of the return for portfolio A is 8% and the standard deviation of the return on the market portfolio is 14%, and the portfolio A’s beta is 0.6, the Jensen’s alpha for portfolio A will be 0.50%.

• A. True
• B. False

Answer 1

Answer 1)

Jensen's Alpha = Return of the portfolio - CAPM Return

= 13% - (Rf - Beta * (Rm - Rf))

= 13% - (5% + 0.80 * (8% - 5%))

= 13% - 7.4%

= 5.6%

The statement is TRUE.

Answer 2)

Jensen's Alpha = Return of the portfolio - CAPM Return

= 6% - (Rf - Beta * (Rm - Rf))

= 6% - (3% + 0.6* (10% - 3%))

= 6% - 7.2%

= -1.2%

The statement is FALSE.

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