Suppose the risk-free return is 3%. The beta of a managed portfolio is 1.75, the alpha is 0%, and the average return is 16%. Based on Jensen's measure of portfolio performance, you would calculate the return on the market portfolio as
A) 12.3%.
B) 10.4%.
C) 15.1%.
D) 16.7%.

Question

Quizplus · Accepted Answer

Jensen's alpha is calculated as: Actual Portfolio Return - [Risk-Free Rate + Beta * (Market Return - Risk-Free Rate)]. Given the alpha is 0%, we can set up the equation as 0% = 16% - [3% + 1.75 * (Market Return - 3%)]. Solving for the Market Return gives us 10.4%.

Suppose the Risk-Free Return Is 3