Answer: 3.7069%

The question involves calculating **Jensen's alpha** for an equity portfolio benchmarked to the Straits Times Index, using the provided regression results. The portfolio has an annual volatility of 12.1%, and the risk-free rate is 2.5% per year (though the risk-free rate is not directly needed for this calculation method). The regression equation given in the chart is: **y = 0.4936x + 3.7069** Where: - **y** = excess return of the portfolio (portfolio return − risk-free rate) - **x** = excess return of the market/benchmark (Straits Times Index return − risk-free rate) This is the standard **single-index model** (or CAPM regression) form using excess returns. Jensen's alpha is the **intercept** in this regression — it represents the average excess return (above what CAPM would predict based on the portfolio's beta) that the portfolio achieved. Now, let's evaluate each option step by step: - **A: 0.4936%** This is **incorrect**. The value 0.4936 is the **slope** of the regression line, which represents the portfolio's **beta (β)**. Beta measures the portfolio's systematic risk/sensitivity to the benchmark's excess returns. It is **not** Jensen's alpha. Confusing the slope with the intercept is a common error. - **B: 0.5387%** This is **incorrect**. The value 0.5387 (or 53.87%) is the **R²** of the regression. R² tells us the proportion of the portfolio's variance explained by the benchmark (here, about 53.87% is explained by market movements, meaning the rest is due to idiosyncratic factors or active management). R² is a goodness-of-fit measure and has no direct relation to Jensen's alpha. - **C: 1.2069%** This is **incorrect**. This value does not appear directly in the regression output and seems to be a distractor (possibly a miscalculation, such as adding/subtracting other numbers or confusing it with another performance metric). It has no basis in the given regression equation. - **D: 3.7069%** This is **correct**. The intercept term in the regression equation (3.7069) is exactly **Jensen's alpha**. It indicates that the portfolio generated an average annualized excess return of 3.7069% beyond what would be expected given its beta of 0.4936 and the CAPM framework. A positive alpha like this suggests skillful active management (outperformance after adjusting for market risk). **Reference Answer: D (3.7069%)** **Key takeaway for FRM Part 1 preparation**: When you see a regression of **excess portfolio returns (y)** on **excess market returns (x)**, Jensen's alpha is always the **intercept** (constant term), not the slope (beta), not R², and not any derived calculation unless additional steps are required. This is a high-frequency testable point in the Quantitative Analysis and Portfolio Management sections of FRM Part 1. Memorize: **Alpha = intercept in the excess-return regression**.