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Up1
Two portfolios have the following characteristics:
PortfolioReturnBetaA8%0.7B7%1.1Given 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.
- -0.2% and -3.6% respectively; Portfolio A has performed better than
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Up3
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.
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Up3Given 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
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Up1
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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