Suppose the Risk-Free Return Is 3

question 29

Multiple Choice

Suppose the risk-free return is 3%. The beta of a managed portfolio is 1.75, the alpha is 0%, and the average return is 16%. Based on Jensen's measure of portfolio performance, you would calculate the return on the market portfolio as

• A) 12.3%.
• B) 10.4%.
• C) 15.1%.
• D) 16.7%.

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Definitions:

Compounding

Compounding in finance refers to the process where an asset's earnings, from either capital gains or interest, are reinvested to generate additional earnings over time.

Compound Interest

Interest calculation that encompasses both the initial principal and the cumulative interest that has accrued in preceding periods on a deposit or loan.

Simple Interest

A way of calculating interest where the interest charge is based on the original principal amount alone.

Compounded Annually

A method of calculating interest where the interest amount is added to the principal sum at the end of each year, affecting the total interest for the next year.