A stock had a return of 16.4 percent and a beta of 1.2. The market return was 12.1 percent and the risk-free rate was 5.2 percent. What is the Jensen-Treynor alpha for the stock?
A) 2.82%
B) 2.43%
C) 2.74%
D) 2.92%
E) 2.51%

Question

Quizplus · Accepted Answer

Jensen's alpha = actual return - expected return = 16.4 - (5.2 + 1.2(12.1 - 5.2)) = 2.43%
Treynor's alpha = actual return - [risk-free rate + beta*(market return - risk-free rate)] = 16.4 - [5.2 + 1.2(12.1 - 5.2)] = 8.58%
Since the question asks for Jensen-Treynor alpha, we need to average the two alphas: (2.43% + 8.58%) / 2 = 5.505%, which is closest to 2.43% (B).

A Stock Had a Return of 16