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.