Accredited Wealth Management Advisor Practice Exam 2025 – Complete Test Prep

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