Question

Question 3 (0.4 points) The following data are available for three portfolios and the market for a recent 10-year period. Which portfolio has highest Jensen's alpha conditioning on CAPM risk-adjusted return? Portfolio Return (%) Std.Dev. (%) Beta 1 14 21 1.15 2 16 24 1.00 3 20 28 1.25 S&P 500 12 20 Risk-free rate 4 3 O2 S&P 500 1

Answer 1

A В C D E 1 portfolio STD DEV Beta required return as per CAPM Jensen's alpha return 1.15 13.20% 0.80% 2 1 14% 21% 3 2 16% 24% 1 12.00% 4.00% 4 3 20% 28% 1.25 14.00% 6.00% 5 S&P500 12.00% 12% 20% 1 0.00% 6 Risk free rate 0.04 7 8 CAPM Required return = risk free rate + (beta*Market Risk premium) 9 Market risk premium = S&P500 return - risk free rate 10 11 Jensen's alpha difference between actual return & required return 12 13 The correct option is 3, as we can see from the calculations portfolio 3 has the highest jensen's alpha 14

A B G Jensen's alpha 1 portfolio required return as per CAPM =$B$6+(D2*($B$5-$B$6}) =$B$6+(D3*($B$5-$B$6)) =SB$6+(D4*($B$5-$B$6) SB$6+(D5*($B$5-$B$6)) STD DEV Beta return B2-E2 2 1 0.14 0.21 1.15 3 2 0.16 0.24 1 B3-E3 1.25 B4-E4 4 3 0.2 0.28 5 S&P500 0.12 0.2 1 B5-E5 6 Risk free rate 0.04 7