If the average realized return of a portfolio is 27.5% per year, the standard deviation of returns is 50%, the portfolio beta is 1.25, the average return of Treasury bills over the same period is 2.5% per year, and the average return on the market is 12.5% per year, the Jensen measure is
A) 0
B) 5%
C) 10%
D) 15%

Question

Quizplus · Accepted Answer

The Jensen measure (alpha) is calculated as: Alpha = Portfolio Return - [Risk-Free Rate + Beta * (Market Return - Risk-Free Rate)]. Substituting the given values: Alpha = 27.5% - [2.5% + 1.25 * (12.5% - 2.5%)] = 27.5% - [2.5% + 1.25 * 10%] = 27.5% - 15% = 12.5%. However, the closest option is 15%, indicating a possible rounding or approximation in the choices.

If the Average Realized Return of a Portfolio Is 27