Accredited Wealth Management Advisor Practice Exam

Disable ads (and more) with a membership for a one time $2.99 payment

Prepare for the Accredited Wealth Management Advisor Exam. Enhance your skills with flashcards and multiple choice questions complete with hints and explanations. Ace your exam confidently!

Each practice test/flash card set has 50 randomly selected questions from a bank of over 500. You'll get a new set of questions each time!

Practice this question and more.

What is the correct calculation for Jensen's alpha of a fund that returned 14% with a beta of 1.1, given a risk-free rate of 4% and a market return of 12%?

The correct answer is: 1.2

To calculate Jensen's alpha, the formula is: Jensen's Alpha = Actual Return - [Risk-Free Rate + Beta × (Market Return - Risk-Free Rate)] In this scenario: - The actual return of the fund is 14% - The risk-free rate is 4% - The beta of the fund is 1.1 - The market return is 12% First, we calculate the expected return using the Capital Asset Pricing Model (CAPM): 1. Calculate the market premium: Market Return - Risk-Free Rate = 12% - 4% = 8% 2. Multiply the market premium by the beta: 1.1 × 8% = 8.8% 3. Add the risk-free rate to this product: 4% + 8.8% = 12.8% Now we can determine Jensen's alpha: Actual Return (14%) - Expected Return (12.8%) = 14% - 12.8% = 1.2% Thus, Jensen's alpha is 1.2%. This signifies that the fund performed better than what was expected given its risk and the market performance. This is evidence of the fund manager's ability to generate excess returns over