Answer: 1.2%.

**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.

Author: LeetQuiz Editorial Team