Question

portfolio	average return	standard deviation	beta
a	18.9%	21.6%	1.92
b	13.2	12.8	1.27

A)The risk-free rate is 3.1 percent and the market risk premium is 6.8 percent. If a portfolio had been formed comprised of 50 percent portfolio A and 50 percent of portfolio B, the actual return, beta, expected return using CAPM, and Jensen's Alpha on the new portfolio is closest to

Answer 1

Given about 2 portfolio,

portfolio	average return	standard deviation	beta
A	18.9%	21.6%	1.92
B	13.2	12.8	1.27

Risk free rate Rf = 3.1%

Market Risk premium MRP = 6.8%

If a portfolio had been formed comprised of 50 percent portfolio A and 50 percent of portfolio B

Weight of portfolio A in new portfolio = 50%

Weight of portfolio B in new portfolio = 50%

So, actual return on new portfolio Rp is weighted average return on its assets

=> Rp = Wa*Ra + Wb*Rb = 0.5*18.9 + 0.5*13.2 = 16.05%

Similarly Beta of portfolio Bp is weighted average beta of its assets

=> Beta of portfolio = Wa*Beta of A + Wb*Beta of b = 0.5*1.92 + 0.5*1.27 = 1.595

So, Expected return on the portfolio using CAPM is

E(P) = Rf + Beta*MRP = 3.1 + 1.595*6.8 = 13.946%

Jensen's Alpha of the portfolio is actual return - expected return

=> Jensen's Alpha of the portfolio = 16.05 - 13.946 = 2.10%