Portfolio Management - Portfolio Management Section 2

1. Last year, a portfolio manager earned a return of 10%. The portfolio’s beta was 0.5. For the same period, the market return was 7% and the average risk-free rate was 4%. Jensen’s alpha for this portfolio is closest to:

  • Option : B
  • Explanation : Jensen’s alpha = return that was actually achieved – expected return based on CAPM = 0.10 – [0.04 + 0.5 (0.07 – 0.04)] = 0.045 or 4.5%.
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2. An investment manager has the following information regarding his portfolio’s return and volatility as compared to the market:

 Return Risk
Market 9.50%17.50%
Portfolio 15.50%23.20%

  • Option : A
  • Explanation : M2 = (Rp − Rf) ∗ ( σm ) − (Rm − Rf)
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3. George, a portfolio manager, aims to maximize risk-adjusted returns. He is most likely to invest in securities with a Jensen’s alpha of:

  • Option : C
  • Explanation : Since George aims to maximize risk-adjusted returns, securities with a higher Jensen’s alpha should have a greater weight in the portfolio.
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4. Which of the following adjusts for total risk?

  • Option : C
  • Explanation : M-squared and Sharpe ratio adjust for total risk, whereas Jensen’s alpha adjusts for systematic risk.
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5. Carlos wants to evaluate the performance of his portfolio manager. He wants to use a measure based on systematic risk and one which does not require a comparison to determine whether the performance is good or not. Which of the following measures is he most likely to use?

  • Option : A
  • Explanation : Jensen’s alpha is based on systematic risk and does not require a comparison. M-squared is based on total risk (not systematic risk). The Treynor ratio is based on systematic risk but requires a comparison.
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