Answer: 0.5%

## Explanation Jensen's alpha measures the abnormal return of a portfolio relative to its expected return based on the Capital Asset Pricing Model (CAPM). The formula for Jensen's alpha is: \[ \alpha = R_p - [R_f + \beta_p \times (R_m - R_f)] \] Where: - \( R_p \) = Portfolio expected return = 8% - \( R_f \) = Risk-free rate = 5% - \( \beta_p \) = Portfolio beta = 0.5 - \( R_m \) = Market expected return = 10% **Calculation:** \[ \alpha = 8\% - [5\% + 0.5 \times (10\% - 5\%)] \] \[ \alpha = 8\% - [5\% + 0.5 \times 5\%] \] \[ \alpha = 8\% - [5\% + 2.5\%] \] \[ \alpha = 8\% - 7.5\% \] \[ \alpha = 0.5\% \] Therefore, Jensen's alpha for portfolio A is **0.5%**, which corresponds to option A. **Key Points:** - Jensen's alpha represents the excess return earned by the portfolio manager beyond what would be expected given the portfolio's systematic risk - A positive alpha indicates superior performance relative to the market - The volatility information (20% for portfolio, 25% for market) is not needed for calculating Jensen's alpha

Author: LeetQuiz .