13Nov Quiz on Jensen Alpha

d2syh
Good Student
Posts: 21
Joined: Fri Aug 17, 2012 3:27 pm

13Nov Quiz on Jensen Alpha

Postby d2syh » Tue Nov 06, 2012 3:25 pm

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?
Choose one answer.
a. 13.54
b. 5.63
c. 10.59
d. 15.99
The correct answer is 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
Finance Junkie
Posts: 119
Joined: Mon Sep 17, 2012 11:06 am

Re: 13Nov Quiz on Jensen Alpha

Postby swarnendupathak » Tue Nov 06, 2012 4:02 pm

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
Good Student
Posts: 21
Joined: Fri Aug 17, 2012 3:27 pm

Re: 13Nov Quiz on Jensen Alpha

Postby d2syh » Wed Nov 07, 2012 11:41 am

thanks...

content.pristine
Finance Junkie
Posts: 356
Joined: Wed Apr 11, 2012 11:26 am

Re: 13Nov Quiz on Jensen Alpha

Postby content.pristine » Fri Nov 09, 2012 12:22 pm

Good Answer Swarnendu!
8-)


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