Portfolio Management - Portfolio Management Section 1

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71. Information about three stocks is provided below:

Stock Expected ReturnBeta
ABC Corp.  6%0.7
KLM Corp.  10%1.0
XYZ Corp. 16%1.5

  • Option : C
  • Explanation : Calculate the required return for the three stocks and compare them with the expected return to see which one is undervalued. For XYZ the required return = 2 + 1.5 x (10 – 2) = 14. XYZ Corp. is undervalued, because it lies above the SML. The expected return, 16%, is more than the required return of 14%.
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72. Which of the following statements is least likely to be correct about
Jensen’s alpha?

  • Option : C
  • Explanation : Jensen’s alpha represents the excess risk-adjusted return of a portfolio and is based on systematic risk.
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