Which of the following statements about Jensen's measure are correct?
I. Through its use of the capital asset pricing model, Jensen's measure automatically adjusts for market return.
II. In general, the higher the Jensen's measure, the better a portfolio has performed.
III. Jensen's measure is referred to as alpha.
IV. A positive Jensen's measure indicates an investment has underperformed the market on a risk-adjusted basis.
A) I and IV only
B) I, II and III only
C) II and III only
D) I, III and IV only

Question

Quizplus · Accepted Answer

Jensen's measure, also known as alpha, evaluates the excess returns of a portfolio over the expected market returns, as predicted by the capital asset pricing model (CAPM). Therefore, it does adjust for market return (I), and a higher Jensen's measure indeed indicates better performance (II). Since it is referred to as alpha (III), these statements are correct. A positive Jensen's measure actually indicates that an investment has outperformed the market on a risk-adjusted basis, making statement IV incorrect.

Which of the Following Statements About Jensen's Measure Are Correct