Question

Chee​ Chew's portfolio has a beta of 1.28 and earned a return of 13.7 % during the year just ended. The​ risk-free rate is currently 4.3 %. The return on the market portfolio during the year just ended was 11.2 %.

a.  Calculate​ Jensen's measure​ (Jensen's alpha) for​ Chee's portfolio for the year just ended.

b.  Compare the performance of​ Chee's portfolio found in part a to that of Carri​ Uhl's portfolio, which has a​ Jensen's measure of negative 0.19. Which portfolio performed​ better? Explain.

c.  Use your findings in part a to discuss the performance of​ Chee's portfolio during the period just ended.

Questions (thumbs up for correct answers) :

A. The​ Jensen's measure​ (Jensen's alpha) for​ Chee's portfolio is (blank) ?

B. Chee's portfolio, with a JM of (.57 or -.19) outperformed​ Carri's portfolio, with a JM of −0.19. A (positive or negative) JM indicates that the (actual or required) return exceeds the (actual or required) return. A (positive or negative) return on a portfolio means that it did not earn its (actual or required) return.

C. Use your findings in part a to discuss the performance of​ Chee's portfolio during the period just ended.  ​(Select the best answer​ below.)

a.Based on its negative JM, Chee's portfolio has performed worse than the market

b.Based on its positive JM, Chee's portfolio has performed better than the market

c.Based on its negative JM, Chee's portfolio has performed better than the market

d.Based on its positive JM, Chee's portfolio has performed worse than the market

Answer 1

Jensen’s alpha = Return on portfolio – CAPM return

CAPM Return = risk free rate + beta*(Market return – risk free return)

= 4.3% + 1.28*(11.2%-4.3%)

= 13.132%

Hence, Jensen’s Alpha = 13.7% - 13.132% = 0.568%

i.e. 0.57%

b. Chee's portfolio, with a JM of .57 outperformed​Carri's portfolio, with a JM of −0.19.

A positive JM indicates that the actual return exceeds the required return

A negative return on a portfolio means that it did not earn its required return

c. b.Based on its positive JM, Chee's portfolio has performed better than the market