A RISK MANAGER IS EVALUATING A PORTFOLIO OF EQUITIES WITH AN ANNUAL...

7.

A risk manager is evaluating a portfolio of equities with an annual volatility of 12.1% per year that is bench-

marked to the Straits Times Index. If the risk-free rate is 2.5% per year, based on the regression results given in

the chart below, what is the Jensen's alpha of the portfolio?

y = 0.4936x + 3.7069

R

²

= 0.5387

a.

0.4936%

b.

0.5387%

c.

1.2069%

d.

3.7069%

Correct Answer: d

Rationale:

The correct answer is d. The Jensen's alpha is equal to the y-intercept, or the excess return of the portfo-

lio when the excess market return is zero. Therefore it is 3.7069%.

Section:

Foundations of Risk Management

Reference:

Noel Amenc and Veronique Le Sourd, Portfolio Theory and Performance Analysis

(West Sussex, England:

John Wiley & Sons, 2003). Chapter 4, Section 4.2 only—”Applying the CAPM to Performance Measurement: Single-

Index Performance Measurement Indicators.”

Learning Objective:

Calculate, compare, and evaluate the Treynor measure, the Sharpe measure, and Jensen's alpha.

2015 Financial Risk Manager (FRM®) Practice Exam