Portfolio Management - Portfolio Management Section 2
- 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%.
| Return | Risk | |
| Market | 9.50% | 17.50% |
| Portfolio | 15.50% | 23.20% |
Given that the risk free rate is 3.50%, M2 would be closest
- 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.
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.
- 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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