Question

The following data are available relating to the performance of Long Horn Stock Fund and the market portfolio: Average return Standard deviations of returns Beta Residual standard deviation Long Horn 19% 35% 1.5 3.0% Market Portfolio 12% 15% 1.0 0.0% The risk-free return during the sample period was 6%. Calculate the Jensen measure of performance evaluation for Long Horn Stock Fund. 4.00% 37.14% 8.67% 31.43% 1.33%

Answer 1

Solution: Answer = 4%

Calculation of Jensen measure of performance evaluation for long horn stock fund:

Jensen measure = Portfolio return - (Risk free rate + Portfolio Beta $\times$ (Market return - Risk free rate))

Given,

Portfolio return = 19%

Risk free rate = 6%

Portfolio beta = 1.5

Market return = 12%

Jensen measure = 19% - (6% + 1.5 $\times$ (12% - 6%))

Jensen measure = 19% - (6% + (1.5 $\times$ 6%))

Jensen measure = 19% - (6% + 9%)

Jensen measure = 19% - 15% = 4%

Jensen measure = 4%