CFA CFA Level 1 CFA Level 1 Question of the Week – Portfolio Management

CFA Level 1 Question of the Week – Portfolio Management

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    • Matt_AnalystPrep
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      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
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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.

    • Matt_AnalystPrep
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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  🙂 

    • itsalwayslupus
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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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      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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