## 13Nov Quiz on Jensen Alpha

d2syh
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Joined: Fri Aug 17, 2012 3:27 pm

### 13Nov Quiz on Jensen Alpha

After analysis of an extraordinary portfolio held by extraordinary manager, following information have been identified.

Expected return on Market Portfolio over risk-free rate: 10.52%
Standard deviation of Market: 12.4%
Correlation coefficient between the return on portfolio and return on market index =0.65
Beta = 1.4
Sharpe Ratio = 1.15
Calculate the Jenson’s Alpha for the given Portfolio?
a. 13.54
b. 5.63
c. 10.59
d. 15.99

[Given Explanation]
Correlation coefficient between the return on portfolio and return on market index = 0.65
So, Beta = [Correlation * Standard Deviation of Portfolio * Standard Deviation of Market] / Standard Deviation of Market^2

Pls explain then how to derive the answer to Jensen's alpha?

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swarnendupathak
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Joined: Mon Sep 17, 2012 11:06 am

### Re: 13Nov Quiz on Jensen Alpha

First calculate COV (Portfolio return, market return) = Beta*SDm^2 = 0.021526
Then, Sd (portfolio) = COV(p,m)/(correlation*SDm) = 0.267077
Then by sharp ratio we get: Rp-Rf = 0.307138 i.e. 1.15*0.267077
And . by CAPM we have, Rf+beta*(Rm-Rf) = Rf+0.1052*1.4 = Rf+0.14728
So, alpha = Rp-CAPM Return
i.e. 0.307138+Rf-(Rf+0.14728) = 15.99%.

Swarnendu

d2syh
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### Re: 13Nov Quiz on Jensen Alpha

thanks...

content.pristine
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