Suppose the risk-free return is 4%. The beta of a managed portfolio is 1.2, the alpha is 1%, and the average return is 14%. Based on Jensen's measure of portfolio performance, you would calculate the return on the market portfolio as
A) 11.5%.
B) 14%.
C) 15%.
D) 16%.

Question

Quizplus · Accepted Answer

Jensen's measure of portfolio performance is given by:Jensen's alpha = Portfolio return - (Risk-free return + Beta * (Market return - Risk-free return))Substituting the given values, we get:1% = 14% - (4% + 1.2 * (Market return - 4%))Solving for the market return, we get:Market return = 15%

Suppose the Risk-Free Return Is 4