Question

Chee​ Chew's portfolio has a beta of 1.29 and earned a return of 13.5% during the year just ended. The​ risk-free rate is currently 4.4%. The return on the market portfolio during the year just ended was 10.9%.

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 −0.22. 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.

Answer 1

(A)

Expected return of Chee Chew's portfolio(Rj)=Rf+Beta(Rm-Rf)

=4.4+1.29(10.9-4.4)

=12.785

Alpha=Actual Return-Expected Return(Rj)

=13.5-12.785

=.715

.

(B) Carry Uhl's Portfolio has negative alpha it means his portfolio has underperformed keeping in view the expected return. Further in comparison with chee's portfolio, the return of CarryUhl's portfolio is not satisfactory.

Hence Chee's Portfolio is better than Carry Uhl's Portfolio

(C) Positive alpha is showing that Chee's portfolio has outperformed.

The Portfolio is earning adequate returns for it's level of risk. Portfoli is earning excess returns than expected

The stock picking ability is good which is resulting in to the portfolio beating the market.

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