Which component of Jensen's Alpha is derived from the market return and risk-free rate?

Jensen's Alpha is a measure of the performance of an investment portfolio compared to a benchmark, typically the market. It focuses on the additional return an investment achieves beyond what could be expected based on its systematic risk, represented by its beta.

The correct choice identifies a specific component in Jensen’s Alpha calculation. The term (B * (Rm - Rf)) represents the risk-adjusted expected return of the investment, where (B) is the beta of the portfolio, (Rm) is the market return, and (Rf) is the risk-free rate. This component reflects how much excess return an investment is expected to generate over the risk-free rate, adjusted for its level of market risk.

In the Jensen's Alpha formula, the actual return of the investment (Rp) is then compared to this expected return. The difference between the actual return and the expected return based on systematic risk gives Jensen's Alpha, thus allowing investors to assess whether an investment has outperformed or underperformed compared to its expected return based on risk.

Consequently, understanding this component is fundamental for risk and performance assessment, as it highlights the relationship between market movements and the returns of an asset or portfolio.