Answer: 0.4%

## 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 for Jensen's alpha is: **α = Rp - [Rf + β(Rm - Rf)]** Where: - α = Jensen's alpha - Rp = Portfolio return = 11% - Rf = Risk-free rate = 3% - β = Portfolio beta = 1.2 - Rm = Market return = 10% **Step-by-step calculation:** 1. Calculate the market risk premium: Rm - Rf = 10% - 3% = 7% 2. Calculate the expected portfolio return using CAPM: Expected return = Rf + β(Rm - Rf) = 3% + 1.2(7%) = 3% + 8.4% = 11.4% 3. Calculate Jensen's alpha: α = Actual return - Expected return = 11% - 11.4% = -0.4% Wait, let me recalculate carefully: **Given data:** - Portfolio return (Rp) = 11% - Market return (Rm) = 10% - Risk-free rate (Rf) = 3% - Portfolio beta (β) = 1.2 **Calculation:** 1. Market risk premium = Rm - Rf = 10% - 3% = 7% 2. Expected portfolio return = Rf + β × (Rm - Rf) = 3% + 1.2 × 7% = 3% + 8.4% = 11.4% 3. Jensen's alpha = Rp - Expected return = 11% - 11.4% = -0.4% This gives -0.4%, which corresponds to option B. However, looking at the options: A. -4.0% B. -0.4% C. 0.4% My calculation shows -0.4%, which is option B. But let me double-check the formula and calculation: **Alternative approach:** α = Rp - [Rf + β(Rm - Rf)] α = 11% - [3% + 1.2(10% - 3%)] α = 11% - [3% + 1.2(7%)] α = 11% - [3% + 8.4%] α = 11% - 11.4% α = -0.4% Yes, the calculation is correct. The Jensen's alpha is -0.4%, which means the portfolio underperformed its expected return based on CAPM by 0.4%. **Key points:** - Jensen's alpha measures risk-adjusted performance - Positive alpha indicates outperformance relative to CAPM expectations - Negative alpha indicates underperformance relative to CAPM expectations - The standard deviation information provided in the table is not needed for Jensen's alpha calculation (it's used for other measures like Sharpe ratio or Treynor ratio)

Author: LeetQuiz .