Jensen alpha compares the portfolio’s actual return with the return predicted by the Capital Asset Pricing Model for its level of systematic risk.

First calculate the CAPM expected return:

Expected return = Risk-free rate + Beta × (Market return − Risk-free rate)

Expected return = 3% + 1.2 × (8% − 3%)

Expected return = 3% + 1.2 × 5%

Expected return = 9%

Jensen alpha is:

Actual return − Expected return = 11% − 9% = 2%

Option C is correct.

A positive alpha indicates that the portfolio outperformed the CAPM-predicted return by two percentage points during the measurement period. A negative alpha would indicate underperformance after adjusting for beta. This does not prove persistent management skill. The result may reflect security selection, temporary factor exposures, luck, benchmark limitations or estimation error.

Jensen alpha should be assessed over an appropriate period and alongside fees, taxes, portfolio mandate and other risk measures. Beta captures systematic market sensitivity but does not measure all possible sources of risk.

The CIRO syllabus expressly requires candidates to calculate and interpret Jensen, Sharpe and Treynor risk-adjusted returns and evaluate portfolio performance against appropriate benchmarks.

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