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 is:

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

Where:

• $R_p$ = Portfolio's expected return = 12.8%
• $R_f$ = Risk-free rate = 4.85%
• $\beta$ = Portfolio beta = 0.7
• $R_m - R_f$ = Market risk premium = 5.25%

Step-by-step calculation:

1. Calculate the expected return using CAPM: $E(R_p) = R_f + \beta(R_m - R_f) = 4.85\% + 0.7 \times 5.25\%$ $E(R_p) = 4.85\% + 3.675\% = 8.525\%$

2. Calculate Jensen's Alpha: $\alpha = R_p - E(R_p) = 12.8\% - 8.525\% = 4.275\%$

3. Round to 4.27%

Therefore, Jensen's Alpha for Portfolio Q is 4.27%, which corresponds to option D.

This positive alpha indicates that Portfolio Q has outperformed its expected return based on its systematic risk level.