Explanation:
Jensen's alpha should be used to determine if a stock is undervalued, and is most appropriate when the stocks being compared have the same beta (a.k.a. nondiversifiable risk).
(Book 1, Module 5.3, LO 5.g)
Question 46
A value investor wishes to add one of two prospective stocks to his existing portfolio. To this end, he wants to determine which of the two stocks is more undervalued. The two stocks appear to have the same level of nondiversifiable risk. The metric he should use is:
A
Treynor.
B
Sharpe.
C
Jensen's alpha.
D
Sortino.
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