A diversified portfolio has a beta of 1.33 and a raw return of 9.38%. The market return is 10.10% and the market risk premium is 6.58%. What is Jensen's alpha of the portfolio?
A)−3.62%
B)−2.89%
C)−.29%
D)2.89%
E)3.62%

Question

Quizplus · Accepted Answer

Jensen's alpha is calculated as the portfolio's return minus the expected return based on the Capital Asset Pricing Model (CAPM). The expected return is calculated as the risk-free rate plus the portfolio's beta times the market risk premium. Assuming the risk-free rate is the market return minus the market risk premium (10.10% - 6.58% = 3.52%), the expected return is 3.52% + 1.33 * 6.58% = 12.27%. Jensen's alpha is 9.38% - 12.27% = -2.89%.

A Diversified Portfolio Has a Beta of 1