The following data are available relating to the performance of Monarch Stock Fund and the market portfolio: $\begin{array}{lcc}
& \text { Monarch } & \text { Market } \
&&\text { Portfolio }\
\text { Average return } & 16 \% & 12\% \
\text { Standard deviations of returns } & 26\% & 22\% \
\text { Beta } & 1.15 & 1.00 \
\text { Residual standard deviation } &1 \% & 0 \%
\end{array}$
The risk-free return during the sample period was 4%.
Calculate Jensen's measure of performance for Monarch Stock Fund.
A) 1.00%
B) 2.80%
C) 44.00%
D) 50.00%

Question

The following data are available relating to the performance of Monarch Stock Fund and the market portfolio: $\begin{array}{lcc} 
& \text { Monarch } & \text { Market } \ 
&&\text { Portfolio }\
\text { Average return } & 16 \% & 12\% \
\text { Standard deviations of returns } & 26\% & 22\% \
\text { Beta } & 1.15 & 1.00 \
\text { Residual standard deviation } &1 \% & 0 \%
\end{array}$
 The risk-free return during the sample period was 4%.
Calculate Jensen's measure of performance for Monarch Stock Fund.
A) 1.00%
B) 2.80%
C) 44.00%
D) 50.00%

Quizplus · Accepted Answer

Jensen's alpha (Jensen's measure) is calculated using the formula: $\alpha = R_i - (R_f + \beta_i (R_m - R_f))$, where $R_i$ is the return on the portfolio (16% for Monarch), $R_f$ is the risk-free rate (4%), $\beta_i$ is the beta of the portfolio (1.15 for Monarch), and $R_m$ is the return on the market portfolio (12%). Plugging in the values: $\alpha = 16\% - (4\% + 1.15 \times (12\% - 4\%)) = 16\% - (4\% + 1.15 \times 8\%) = 16\% - (4\% + 9.2\%) = 16\% - 13.2\% = 2.8\%$.

The Following Data Are Available Relating to the Performance of Monarch