Two portfolios have the following characteristics: Portfolio Return Beta A 8% 0.7 B 7% 1.1 Given a market return of 10% and a risk-free rate of 4%, calculate Jensen's Alpha for both portfolios and comment which portfolio has performed better. -0.2% and -3.6% respectively; Portfolio A has performed better than Portfolio B. -0.2% and -3.6% respectively; Portfolio B has performed better than Portfolio A. 0.2% and 3.6% respectively; Portfolio B has performed better than Portfolio A.

dollface said: Isn't the question a bit ambiguous when it asks 'which portfolio has performed better'? From a pure return basis Portfolio A has performed better, but under Jensen's alpha it might be different. Performed better according to the Jensen's Alpha measure :)

Isn't the question a bit ambiguous when it asks 'which portfolio has performed better'? From a pure return basis Portfolio A has performed better, but under Jensen's alpha it might be different.

CFA Level 1 Question Of The Week - Portfolio Management (6) - CFA Level 1

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This topic has 4 replies, 3 voices, and was last updated Oct-196:28 pm by Matt_AnalystPrep.

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- Matt_AnalystPrep
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  21 Oct 2019 at 7:59 am
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  dollface said:
  
  Isn’t the question a bit ambiguous when it asks ‘which portfolio has performed better’? From a pure return basis Portfolio A has performed better, but under Jensen’s alpha it might be different.
  
  Performed better according to the Jensen’s Alpha measure 🙂
- dollface
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  20 Oct 2019 at 3:11 pm
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  Isn’t the question a bit ambiguous when it asks ‘which portfolio has performed better’? From a pure return basis Portfolio A has performed better, but under Jensen’s alpha it might be different.
- itsalwayslupus
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  22 Oct 2019 at 5:58 am
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  Given a market return of 10% and a risk-free rate of 4%, the portfolio with the best performance according to Jensen’s Alpha is most likely:
  
  FTFY
- Matt_AnalystPrep
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  23 Oct 2019 at 6:28 pm
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  The correct answer is A.
  
  Jensen’s Alpha = Rp – [Rf + Bp (Rm – Rf)]
  Jensen’s AlphaPortfolio A = 0.08 – [0.04 + 0.7(0.1 – 0.04)] = -0.002
  Jensen’s AlphaPortfolio B = 0.07 – [0.04 + 1.1(0.1 – 0.04)] = -0.036
  
  Jensen’s Alpha is -0.2% and -3.6% for A and B respectively. A higher Alpha indicates that a portfolio has performed better.
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