Question

1. Explain the meaning of Systematic risk?

2. Explain the meaning of Jensen's alpha ( and some graph will be included)

Please, explain in detail as much as possible.

Answer 1

1.systematic risk means all such uncontrollable risk which are reflecting the market related risk and which are beyond the control of the company because these are occurring due to macro factors like interest rates and inflation and political instability into the country.

Systematic risk can never be diversified and they can only be minimised through allocation of assets into different portfolios and the systematic risk will be representing the market related risks.

2. Jensen Alpha is used to calculate the performance of the portfolio in relation to expected rate of return which will be calculated using Capital Asset pricing model and Jensen Alpha is the rate of excess return which are made by an investor after comparison with the expected rate of return in respect of Capital Asset pricing model and this kind of difference into Capital Asset pricing model's expected rate of return and return generated through investors will be leading to creation of an Alpha which will be ascertainment of premium to the overall portfolio.