Questions: Question 13 0.5 pts The Western Fund generated a return of 10.4% over the last year. The relevant market portfolio had a return of 9.6% and the risk-free return was 2.1%. Western Fund's beta is 1.28. The Jensen's alpha for the fund is closest to: +1.7 -0.2 +0.8 -1.3 Question 14 0.5 pts A fixed-income money manager increases the duration of a portfolio beyond its strategic duration level because she expects a

Solution Steps

To calculate Jensen's alpha, we use the formula: \[ \alpha = R_i - [R_f + \beta (R_m - R_f)] \] where:

• \( R_i \) is the return of the fund,
• \( R_f \) is the risk-free return,
• \( \beta \) is the beta of the fund,
• \( R_m \) is the return of the market portfolio.

Given:

• \( R_i = 10.4\% \)
• \( R_f = 2.1\% \)
• \( \beta = 1.28 \)
• \( R_m = 9.6\% \)

We will plug these values into the formula to find Jensen's alpha.

We are given the following values:

• Return of the fund, \( R_i = 10.4\% = 0.104 \)
• Risk-free return, \( R_f = 2.1\% = 0.021 \)
• Beta of the fund, \( \beta = 1.28 \)
• Return of the market portfolio, \( R_m = 9.6\% = 0.096 \)

Jensen's alpha is calculated using the formula: \[ \alpha = R_i - \left[ R_f + \beta (R_m - R_f) \right] \]

Substitute the given values into the formula: \[ \alpha = 0.104 - \left[ 0.021 + 1.28 (0.096 - 0.021) \right] \]

First, calculate the term inside the brackets: \[ 0.021 + 1.28 (0.096 - 0.021) = 0.021 + 1.28 \times 0.075 = 0.021 + 0.096 = 0.117 \]

Then, subtract this result from \( R_i \): \[ \alpha = 0.104 - 0.117 = -0.013 \]

Convert the alpha value to a percentage: \[ \alpha \times 100 = -0.013 \times 100 = -1.3\% \]

Final Answer