Question

Suppose the risk-free return is 4%. The beta of a managed portfolio is 1.2, the alpha is 1%, and the average return is 14%. Based on Jensen's measure of portfolio performance, you would calculate the return on the market portfolio as Multiple Choice 16%. 11.5%. 14%. 15%.

Answer 1

Answer:

11.5%

Explanation:

The  computation of the return on the market portfolio is shown below:

As we know that

Alpha = Average return - [risk free return + beta ( return on market portfolio - risk free return)]

0.01 = 0.14 - [0.04 + 1.2 (return on market portfolio - 0.04)]

0.01 = 0.14 - [0.04 + 1.2 return on market portfolio - 0.048]

0.01 = 0.14 - 0.04 - 1.2 return on market portfolio + 0.048

1.2 return on market portfolio = 0.14 - 0.04 + 0.048 - 0.01

1.2 return on market portfolio = 0.138

So, the return on the market portfolio is

= 0.138 ÷ 1.2

= 11.5%