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)