The following data are available relating to the performance of Monarch Stock Fund and the market portfolio: 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:  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 measure of performance is calculated as the difference between the actual return on the portfolio and the return that would have been achieved based on the portfolio's beta and the market return, multiplied by the amount of systematic risk in the portfolio (measured by beta).

Jensen's measure = Portfolio return - [Risk-free rate + (Market return - Risk-free rate) * Beta]

Using the given data:

- Risk-free rate = 4%
- Market portfolio return = 12%
- Monarch Stock Fund return = 13.4%
- Beta of Monarch Stock Fund = 1.2

Jensen's measure = 13.4% - [4% + (12% - 4%) * 1.2]
= 13.4% - 10.8%
= 2.6%

Therefore, the correct answer is B) 2.80%.

The Following Data Are Available Relating to the Performance of Monarch