Answer: -0.2% and -3.6% respectively Portfolio A has performed better than Portfolio B.

## Explanation Jensen's Alpha measures the excess return of a portfolio compared to its expected return based on the Capital Asset Pricing Model (CAPM). The formula is: **Jensen's Alpha = Rp - [Rf + βp(Rm - Rf)]** Where: - Rp = Portfolio return - Rf = Risk-free rate - βp = Portfolio beta - Rm = Market return ### Calculations: **For Portfolio A:** - Rp = 8% = 0.08 - Rf = 4% = 0.04 - βp = 0.7 - Rm = 10% = 0.10 Jensen's Alpha = 0.08 - [0.04 + 0.7(0.10 - 0.04)] = 0.08 - [0.04 + 0.7(0.06)] = 0.08 - [0.04 + 0.042] = 0.08 - 0.082 = -0.002 = -0.2% **For Portfolio B:** - Rp = 7% = 0.07 - Rf = 4% = 0.04 - βp = 1.1 - Rm = 10% = 0.10 Jensen's Alpha = 0.07 - [0.04 + 1.1(0.10 - 0.04)] = 0.07 - [0.04 + 1.1(0.06)] = 0.07 - [0.04 + 0.066] = 0.07 - 0.106 = -0.036 = -3.6% ### Interpretation: - Both portfolios have negative alphas, meaning they underperformed their expected returns based on CAPM - Portfolio A has a higher alpha (-0.2%) than Portfolio B (-3.6%) - A higher Jensen's Alpha indicates better risk-adjusted performance - Therefore, Portfolio A has performed better than Portfolio B **Key Insight:** Even though both portfolios underperformed expectations, Portfolio A's underperformance is much smaller than Portfolio B's, making it the relatively better performer.

Author: Tanishq Prabhu