Which of the following formulas is used for Jensen's Alpha calculation?

Jensen's Alpha is a measure that evaluates the performance of an investment portfolio relative to a benchmark, taking into account the risk taken to achieve that performance. The specific formula used for Jensen's Alpha is designed to assess whether a portfolio has outperformed or underperformed its expected return based on its systematic risk.

The correct formula for Jensen's Alpha is expressed as the actual return of the portfolio minus the expected return based on the Capital Asset Pricing Model (CAPM). In mathematical terms, Jensen's Alpha is calculated as follows:

Alpha = Rp - [Rf + Portfolio Beta * (Rm - Rf)]

In this formula:

• Rp represents the actual return of the portfolio.

• Rf is the risk-free rate.

• Portfolio Beta measures the sensitivity of the portfolio's returns to the returns of the market (or the benchmark).

• Rm represents the expected return of the market.

This formula effectively captures the additional return that the portfolio generates over and above the expected return based on its risk. A positive Jensen's Alpha indicates that the portfolio has delivered better performance than predicted, while a negative value suggests underperformance.

The other options present different concepts and formulas that do not directly relate to Jensen's Alpha. Option B refers to the binomial probability formula,