Suppose the risk-free return is 2% and the return on the market is 10%. The beta of a managed portfolio is 1.5, and the average realized return is 13%. According to the CAPM, Jensen’s alpha of the managed portfolio is: A) –1% B) 0% C) 1% D) 2% E) none of the above
Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
Suppose the risk-free return is 2% and the return on the market is 10%. The beta of a
managed portfolio is 1.5, and the average realized return is 13%. According to the
CAPM, Jensen’s alpha of the managed portfolio is:
A) –1%
B) 0%
C) 1%
D) 2%
E) none of the above
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