The following data are available relating to the performance of Sooner Stock Fund and the market portfolio: The risk-free return during the sample period was 3%.
Calculate the Jensen measure of performance evaluation for Sooner Stock Fund.
A)2.6%
B)4.00%
C)8.67%
D)31.43%

Question

The following data are available relating to the performance of Sooner Stock Fund and the market portfolio:  The risk-free return during the sample period was 3%.
Calculate the Jensen measure of performance evaluation for Sooner Stock Fund.
A)2.6% 
B)4.00% 
C)8.67% 
D)31.43%

Quizplus · Accepted Answer

The Jensen measure is calculated as the difference between the realized return of the portfolio and the expected return based on the CAPM model (using the beta of the portfolio and the market risk premium).

Jensen measure = realized return - (risk-free rate + beta * (market return - risk-free rate))

From the data provided, we can calculate that the expected return of the Sooner Stock Fund based on the CAPM model is:

Expected return = 3% + 1.2 * (12% - 3%) = 12.6%

And the realized return of the Sooner Stock Fund is given as 15.2%.

Therefore, the Jensen measure of performance evaluation for Sooner Stock Fund is:

Jensen measure = 15.2% - (3% + 1.2 * (12% - 3%)) = 2.6%

Therefore, the best choice is A.

The Following Data Are Available Relating to the Performance of Sooner