Question

If you took all 500 companies in the S&P 500 and estimated their betas which of the following is true for the average Jensen's alpha and average beta across all 500 companies in the S&P500.

a.

Average beta = 1, Average Jensen's alpha=0

b.

Average beta = 1, Average Jensen's alpha=1

c.

Average beta = 0, Average Jensen's alpha=1

d.

Average beta = 0, Average Jensen's alpha=0

Answer 1

As we know that the Beta is the correlation of a stock with respect to the market or index so in this case the average beta will be 1 as the average of betas of all the stock will be equal to the market's returns.

Jensen's Alpha is the excessive return with respect to the benchmark or market. So in this case the average Jensen Alpha will converge to zero as the excess return than the market will be zero.

So our Answer is Option a. Average Beta =1, Average Jensen's Alpha = 0