Explanation:
Jensen's Alpha is calculated as follows:
Jensen's Alpha = Rp - [Rf + Bp (Rm - Rf)]
Jensen's Alpha<sub>Portfolio A</sub> = 0.08 - [0.04 + 0.7(0.1 - 0.04)] = -0.002
Jensen's Alpha<sub>Portfolio B</sub> = 0.07 - [0.04 + 1.1(0.1 - 0.04)] = -0.036
Jensen's Alpha is -0.2% and -3.6% for A and B, respectively. A higher Alpha indicates that a portfolio has performed better.
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Q.3473 Two portfolios have the following characteristics:
| Portfolio | Return | Beta |
|---|---|---|
| A | 8% | 0.7 |
| B | 7% | 1.1 |
Given a market return of 10% and a risk-free rate of 4%, calculate Jensen's Alpha for both portfolios and comment on which portfolio has performed better.
A
-0.2% and -3.6% respectively
Portfolio A has performed better than Portfolio B.
B
-0.2% and -3.6% respectively
Portfolio B has performed better than Portfolio A.
C
0.2% and 3.6% respectively
Portfolio B has performed better than Portfolio A.
D
3.6% and 0.2% respectively
Portfolio A has performed better than Portfolio B.
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