The following data are available relating to the performance of Sooner Stock Fund and the market portfolio: $\begin{array}{lcc}
& \text { Sooner } & \text { Market } \
&&\text { Portfolio }\
\text { Average return } & 20 \% & 11\% \
\text { Standard deviations of returns } & 44\% & 19\% \
\text { Beta } & 1.8 & 1.0 \
\text { Residual standard deviation } & 2.0 \% & 0.0 \%
\end{array}$
The risk-free return during the sample period was 3%.
Calculate the Jensen measure of performance evaluation for Sooner Stock Fund.
A) 2.6%
B) 4.00%
C) 8.67%
D) 31.43%
E) 37.14%

Question

The following data are available relating to the performance of Sooner Stock Fund and the market portfolio: $\begin{array}{lcc} 
& \text { Sooner } & \text { Market } \
&&\text { Portfolio }\
\text { Average return } & 20 \% & 11\% \
\text { Standard deviations of returns } & 44\% & 19\% \
\text { Beta } & 1.8 & 1.0 \
\text { Residual standard deviation } & 2.0 \% & 0.0 \%
\end{array}$
 The risk-free return during the sample period was 3%.
Calculate the Jensen measure of performance evaluation for Sooner Stock Fund.
A) 2.6%
B) 4.00%
C) 8.67%
D) 31.43%
E) 37.14%

Quizplus · Accepted Answer

The Jensen measure (or Jensen's alpha) is calculated as: $\alpha = R_i - (R_f + \beta_i (R_m - R_f))$, where $R_i$ is the return on the portfolio, $R_f$ is the risk-free rate, $\beta_i$ is the beta of the portfolio, and $R_m$ is the return on the market portfolio. For Sooner Stock Fund, this calculation is: $20\% - (3\% + 1.8(11\% - 3\%)) = 20\% - (3\% + 1.8 \times 8\%) = 20\% - (3\% + 14.4\%) = 20\% - 17.4\% = 2.6\%$.

The Following Data Are Available Relating to the Performance of Sooner