Explanation:

Jensen's alpha measures the excess return of a portfolio over its expected return based on the Capital Asset Pricing Model (CAPM). The formula for Jensen's alpha is:

$\text{Jensen's alpha} = R_p - [R_f + \beta_p (R_m - R_f)]$

Where:

• $R_p$ = Portfolio return (7.0%)
• $R_f$ = Risk-free rate (1.0%)
• $\beta_p$ = Portfolio beta (1.2)
• $R_m$ = Market return (5.0%)

Plugging in the values:

$\text{Jensen's alpha} = 7.0\% - [1.0\% + 1.2 \times (5.0\% - 1.0\%)]$ $= 7.0\% - [1.0\% + 1.2 \times 4.0\%]$ $= 7.0\% - [1.0\% + 4.8\%]$ $= 7.0\% - 5.8\% = 1.2\%$

Option B (1.2%) is correct because it accurately reflects the calculation of Jensen's alpha. Option A (0.0%) incorrectly uses the market return instead of the market risk premium, and Option C (2.2%) omits the risk-free rate in the calculation.