Question

6. (Jensen's alpha) The risk- n's alpha) The risk-free rate is 2%. You observe two fund managers (A and B) and the market portfolio. Use в со JENSEN'S ALPHA 2 Risk-free return 2% 3 Mutual fund 4 Mean return 5 Standard deviation 6 Correlation coefficient with the market (Pim) 7 Beta 8 "Normative return" (based on the SML) 9 Jensen's alpha A 7% 25% 0.36 Market portfolio 10% 18% B 20% 72% 0.5 a. Calculate the beta of each stock and the market portfolio. b. Calculate the "Normative return" based on the SML for each stock and the market portfolio. c. Calculate Jensen's alpha for each stock and the market portfolio.

Answer 1

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

Risk free return 0.02 on 0.72 Mutual Fund Market Portfolio Mean return 0.07 0.2 0.1 Standard deviation 0.25 0.18 Correlation with market 0.36 0.5 Beta =(C8*c7)/$E$7 =(D8*D7)/$E$7 =(E8*E7)/$E$7 Normative return =$C$3+C9*($E$6-$C$3) =$C$3+D9*($E$6-$C$3) =$C$3+E9*($E$6-$C$3) Jensen's alpha =C6-C10 =D6-D10 =E6-E10

Cell reference -

Risk free return 0.02 Mutual Fund А Market Portfolio Mean return 0.07 0.2 0.1 Standard deviation 0.25 0.72 0.18 Correlation with market 0.36 0.5 Beta =(C8*C7)/$E$7 =(D8*D7)/$E$7 =(E8*E7)/$E$7 Normative return =$C$3+C9*($E$6-$C$3) =$C$3+D9*($E$6-$C$3) =$C$3+E9*($E$6-$C$3) Jensen's alpha =C6-C10 =D6-D10 =E6-E10

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