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If the return on portfolio A is 10%, the market portfolio return is 12%, the inflation...

If the return on portfolio A is 10%, the market portfolio return is 12%, the inflation rate is 2%, the risk-free rate is 3%, the standard deviation of the return for portfolio A is 8% 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 1.60%.
  • A. True
  • B. False
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Answer #1

Correct answer is (B) False

Variance of portfolio A is also called total risk.And we know that Total risk =Systematic risk+ Non systematic risk

It means Systematic risk cannot be greater than total risk .

Now Variance of portfolio A i.e, Total risk = square of standard deviation=82=64

And systematic risk =Beta 2 * variance of market portfolio

=(0.6)2 *142 =70.56

As we can see that systematic risk calculated above is greater than total risk of portfolio A which is not possible

Therefore ,Given information in question is False

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