Problem 13-20 Jensen\'s Alpha (LO1, CFA7) You have been given the following retu

Question

Problem 13-20 Jensen's Alpha (LO1, CFA7) You have been given the following return information for a mutual fund, the market index, and the risk-free rate. You also know that the return correlation between the fund and the market is O.93 Risk-Free 1% Year 2011 2012 2013 2014 2015 Fund -23·60% 25.10 14.40 7.00 -2.40 Market -44. 50% 21.50 15.40 9.20 -6.20 Calculate Jensen's alpha for the fund, as well as its information ratio. (Do not round intermediate calculations. Enter the alpha as a percent rounded to 2 decimal places. Round the ratio to 4 decimal places.) Jensen's alpha Information ratio

Explanation / Answer

Year Fund Market Risk-Free 2008 -23.60% -44.50% 1.00% 2009 25.10% 21.50% 3.00% 2010 14.40% 15.40% 2.00% 2011 7.00% 9.20% 6.00% 2012 -2.40% -6.20% 2.00% Calculate Jensen’s alpha for the fund, as well as its information ratio. Year Fund Market Excess Return Risk-Free 2008 -23.60% -44.50% 20.90% 1.00% 2009 25.10% 21.50% 3.60% 3.00% 2010 14.40% 15.40% -1.00% 2.00% 2011 7.00% 9.20% -2.20% 6.00% 2012 -2.40% -6.20% 3.80% 2.00% Expected Return = Average(-23.60%,25.10%,14.40%,75,-2.40%) 4.10% -0.92% 5.02% 2.80% Standard Deviation is calculated using STDEV function in excel 18.47% 26.45% 9.27% Beta = Correlation of Asset to Market * (Std Dev of Asset / Std Dev of Market) Beta = .93 x 18.47%/26.45% 0.65 Alpha = R(i) - ( (R(f) + B x (R(m) - R(f)))) Alpha = 4.10% - (2.80% + 0.65 x (-0.92% - 2.80%)) 3.72% Information Ratio = Jensen alpha/ Tracking Error Information Ratio = 3.72% / 9.27% 0.4007 Tracking error is standard deviation of excess return

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