Financial Risk Manager Part 1

Get started today

Ultimate access to all questions.

Explanation:

Explanation

We can rearrange the Jensen's alpha formula to solve for beta:

$\alpha = R_p - [R_f + \beta (R_m - R_f)]$

Given:

$\alpha$ = Jensen's alpha = 4.75%
$R_p$ = Actual portfolio return = 14.2%
$R_f$ = Risk-free rate = 4.25%
$R_m - R_f$ = Market risk premium = 6%

Rearranging the formula: $\alpha = R_p - R_f - \beta (R_m - R_f)$ $\beta (R_m - R_f) = R_p - R_f - \alpha$ $\beta = \frac{R_p - R_f - \alpha}{R_m - R_f}$

Calculation: $\beta = \frac{14.2\% - 4.25\% - 4.75\%}{6\%}$ $\beta = \frac{5.2\%}{6\%}$ $\beta = 0.8667$

Rounded to two decimal places, the beta is 0.87, which corresponds to option B.

Explanation:

Explanation

We can rearrange the Jensen's alpha formula to solve for beta:

$\alpha = R_p - [R_f + \beta (R_m - R_f)]$

Given:

$\alpha$ = Jensen's alpha = 4.75%
$R_p$ = Actual portfolio return = 14.2%
$R_f$ = Risk-free rate = 4.25%
$R_m - R_f$ = Market risk premium = 6%

Rearranging the formula: $\alpha = R_p - R_f - \beta (R_m - R_f)$ $\beta (R_m - R_f) = R_p - R_f - \alpha$ $\beta = \frac{R_p - R_f - \alpha}{R_m - R_f}$

Calculation: $\beta = \frac{14.2\% - 4.25\% - 4.75\%}{6\%}$ $\beta = \frac{5.2\%}{6\%}$ $\beta = 0.8667$

Rounded to two decimal places, the beta is 0.87, which corresponds to option B.

Comments (0)

No comments yet.

You are analyzing a portfolio that has a Jensen's alpha of 4.75% and an actual return of 14.2%. The risk-free rate is 4.25% and the market risk premium is 6%. Based on the information provided, the beta of the portfolio is closest to:

Exam-Like

0.77

0.0%

0.87

100.0%

0.97

1.07