Question

Your portfolio returned 10.1​% last​ year, with a beta equal to 2.1. The market return was 7.5​%, and the​ risk-free rate 3.2 %. Did you earn more or less than the required rate of return on your​ portfolio? ​ (Use Jensen's​ measure.)

The​ Jensen's measure for your portfolio is _​%.

Answer 1

Calculation of Jensen's measure (alpha) for yout portfolio:

Formular:

Alpha = Return of Portfolio - [ Risk free rate + beta x (Market return - Risk free rate)]

= 10.1% - [ 3.20% + 2.1 x (7.5% - 3.2%)]

= 10.1% - [3.20% + 9.03% ]

= 10.10% - 12.23%

= - 2.13%

So, from the above calculation it can be seen that you earned less than the required rate of return on your portfolio.

Note:

1) [ Risk free rate + beta x (Market return - Risk free rate)] = Required rate of return