Explanation:
Jensen's alpha measures the excess return of a portfolio over its expected return as predicted by the Capital Asset Pricing Model (CAPM).
Calculate the expected return using CAPM: E(R) = Risk-Free Rate + Beta × (Market Return - Risk-Free Rate) E(R) = 5% + 0.5 × (12% - 5%) E(R) = 5% + 0.5 × 7% = 5% + 3.5% = 8.5%.
Calculate Jensen's alpha: Alpha = Actual (or Expected Portfolio) Return - CAPM Expected Return Alpha = 10% - 8.5% = 1.5%.
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Q.21 Portfolio Y has an expected return of 10%, volatility of 25%, and a beta of 0.5. The market has an expected return of 12% and volatility of 25%. Assuming that the risk-free rate is 5%, what is Jensen’s alpha for portfolio Y?
A
6%
B
2.0%
C
3.5%
D
1.5%
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