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CFA Level 1 Question of the Week - Portfolio Management
Two portfolios have the following characteristics:
Portfolio | Return | Beta |
---|
A | 8% | 0.7 |
B | 7% | 1.1 |
Given 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.
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CFA Level 1 Question of the Week - Portfolio Management 6 votes
-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 ·
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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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