Question 1

Chuck Douglass,an imperfect forecaster correctly predicts 57% of all bull markets and 68% of all bear markets.Roy Simmonds is a perfect forecaster.If Chuck Douglass is able to charge a fee of $125,000,the fee that Roy Simmonds should charge is __________.Assume that both forecasters manage similar size funds.
A) $31,250
B) $200,000
C) $500,000
D) $625,000

Accepted Answer

The answer of Chuck Douglass,an imperfect forecaster correctly predicts 57%...

Question 2

In the Treynor-Black model,the contribution of individual security to the active portfolio should be based primarily on the stock's _________.
A) alpha
B) beta
C) the residual variance
D) appraisal ratio

Accepted Answer

The answer of In the Treynor-Black model,the contribution of individual...

Question 3

Portfolio managers Paul Martin and Kevin Krueger each manage $1,000,000 funds.Paul Martin has perfect foresight and the call option value of his perfect foresight is $150,000.Kevin Krueger is an imperfect forecaster and correctly predicts 50% of all bull markets and 70% of all bear markets.The value of Kevin Krueger's imperfect forecasting ability is __________.
A) $30,000
B) $67,500
C) $108,750
D) $217,500

Accepted Answer

The answer of Portfolio managers Paul Martin and Kevin Krueger...

Question 4

Active portfolio managers try to construct a risky portfolio with _______.
A) a higher Sharpe measure than a passive strategy
B) a lower Sharpe measure than a passive strategy
C) the same Sharpe measure as a passive strategy
D) very few securities

Accepted Answer

Active portfolio managers aim to outperform the market by constructing a portfolio with a higher Sharpe measure than a passive strategy. A higher Sharpe measure represents a better risk-adjusted return, so a portfolio with a higher Sharpe measure is preferred. Therefore, choice A is the correct answer.

Question 5

The critical variable in the determination of the success of the active portfolio is the stock's __________.
A) alpha/nonsystematic risk
B) alpha/systematic risk
C) delta/nonsystematic risk
D) delta/systematic risk

Accepted Answer

The critical variable in the determination of the success of the active portfolio is the stock's alpha/nonsystematic risk. This is because alpha represents the excess return of a stock over its expected return, which is considered to be the stock's unique or idiosyncratic risk or nonsystematic risk. Therefore, managing and reducing a portfolio's alpha/nonsystematic risk is essential for achieving superior risk-adjusted returns. Systematic risk or delta, on the other hand, is related to the overall market risk and cannot be diversified away through portfolio management.

Question 6

The market timing form of active portfolio management relies on __________ forecasting and the security selection form of active portfolio management relies on __________ forecasting.
A) macroeconomic; macroeconomic
B) macroeconomic; microeconomic
C) microeconomic; macroeconomic
D) microeconomic; microeconomic

Accepted Answer

The market timing form of active portfolio management relies on macroeconomic forecasting, while the security selection form of active portfolio management relies on microeconomic forecasting. Therefore, option B, which suggests macroeconomic forecasting for market timing and microeconomic forecasting for security selection, is the correct answer.

Question 7

Stocks A and B have alphas of .01 and betas of .90.Stock A has a residual variance of .020 while stock B has a residual variance of .016.If stock A represents 2% of an active portfolio,stock B should represent __________ of an active portfolio.
A) 1.6%
B) 2.0%
C) 2.2%
D) 2.5%

Accepted Answer

The answer of Stocks A and B have alphas of...

Question 8

The correct measure of timing ability is ____________ for a portfolio manager who correctly forecasts 55% of bull markets and 55% of bear markets.
A) -5%
B) 5%
C) 10%
D) 95%

Accepted Answer

The answer of The correct measure of timing ability is...

Question 9

A market timing strategy is one where asset allocation in the stock market __________ when one forecasts the stock market will outperform treasury bills.
A) decreases
B) increases
C) remains the same
D) may increase or decrease

Accepted Answer

A market timing strategy involves adjusting asset allocation in anticipation of market movements. If one forecasts the stock market will outperform treasury bills, they will increase their allocation to stocks, making choice B the correct answer.

Question 10

Consider the theory of active portfolio management.Stocks A and B have the same positive alpha and the same nonsystematic risk.Stock A has a higher beta than stock B. You should want __________ in your active portfolio.
A) equal proportions of stocks A and B
B) more of stock A than stock B
C) more of stock B than stock A
D) more information is needed to answer this question

Accepted Answer

The answer of Consider the theory of active portfolio management.Stocks...

Question 11

In performance measurement the bogey portfolio is designed to _________.
A) measure the returns to a completely passive strategy
B) measure the returns to a similar active strategy
C) measure the returns to a given investment style
D) equal the return on the S&P500

Accepted Answer

The bogey portfolio is designed to measure the returns to a completely passive strategy, typically using a market index as a benchmark. It provides a basis for comparison to evaluate the performance of an investment manager or a fund against a simple, low-cost, passive approach.

Question 12

It is very hard to statistically verify abnormal fund performance because of all except which one of the following?
A) Inevitably some fund managers experience streaks of good performance that may just be due to luck
B) The noise in realized rates of return is so large as to make it hard to identify abnormal performance in competitive markets
C) Portfolio composition is rarely stable long enough to identify abnormal performance
D) Even if successful, there is really not much value to be added by active strategies such as market timing

Accepted Answer

The other options (A, B, and C) all acknowledge difficulties in verifying abnormal fund performance, but option D suggests that even if successful, active strategies such as market timing may not provide much added value, which is not directly related to the stated difficulties. Therefore, option D does not belong with the others in addressing the question at hand.

Question 13

If all ___ are ___ in the Treynor-Black model,there would be no reason to depart from the passive portfolio.
A) alphas; zero
B) alphas; positive
C) betas; positive
D) standard deviations; positive

Accepted Answer

In the Treynor-Black model, if all alphas are zero, it indicates that no security is expected to outperform the market on a risk-adjusted basis, thus there is no reason to deviate from the passive portfolio.

Question 14

Consider the theory of active portfolio management.Stocks A and B have the same beta and non-systematic risk.Stock A has higher positive alpha than stock B. You should want __________ in your active portfolio.
A) equal proportions of stocks A and B
B) more of stock A than stock B
C) more of stock B than stock A
D) more information is needed to answer this question

Accepted Answer

Since stock A has a higher positive alpha than stock B, it is expected to outperform stock B in the future. Therefore, it is preferable to have more of stock A in the active portfolio.

Question 15

A mutual fund invests in large-capitalization stocks.Its performance should be measured against which one of the following?
A) Russell 2000 index
B) S&P 500 index
C) Wilshire 5000 index
D) Dow Jones Industrial Average

Accepted Answer

A mutual fund investing in large-cap stocks should be benchmarked against an index that represents large-cap stocks, and the S&P 500 index is one of the primary indices for large-cap stocks. The other options represent either small-cap stocks (Russell 2000) or a broader range of market capitalizations (Wilshire 5000). The Dow Jones Industrial Average is also not an ideal benchmark because it only tracks 30 large-cap stocks, which is too limited compared to the diversification of a mutual fund.

Question 16

In the Treynor-Black model,the weight of each analyzed security in the portfolio should be proportional to its __________.
A) alpha/beta
B) alpha/residual variance
C) beta/residual variance
D) none of the above

Accepted Answer

In the Treynor-Black model, the weight of each analyzed security in the portfolio is proportional to its alpha divided by its residual variance. This helps in determining the contribution of each security to the portfolio's overall performance.

Question 17

A passive benchmark portfolio is _______________.
I.a portfolio where the asset allocation across broad asset classes is neutral and not determined by forecasts of performance of the different asset classes
II.one where an indexed portfolio is held within each asset class
III.often called the bogey
A) I only
B) I and III only
C) II and III only
D) I, II and III

Accepted Answer

A passive benchmark portfolio is characterized by a neutral asset allocation (I), holding indexed portfolios within each asset class (II), and is often referred to as the bogey (III).

Question 18

__________ portfolio manager(s)experience streaks of abnormal returns which are hard to label as lucky outcomes,and ____ anomalies in realized returns have been sufficiently persistent such that portfolio managers could use them to beat a passive strategy over prolonged periods.
A) No; no
B) No; some
C) Some; no
D) Some; some

Accepted Answer

The statement suggests that some portfolio managers experience abnormal returns that are not just lucky outcomes, and that these anomalies are persistent enough for portfolio managers to beat a passive strategy over prolonged periods. Therefore, the correct answer is D - Some portfolio managers experience abnormal returns that are not just lucky outcomes, and some anomalies in realized returns have been persistent enough for portfolio managers to beat a passive strategy over prolonged periods.

Question 19

Active portfolio management consists of __________.
I.market timing
II.security selection
III.sector selection within given markets
IV.indexing
A) I and II only
B) II and III only
C) I, II and III only
D) I, II, III and IV

Accepted Answer

Active portfolio management involves all three strategies of market timing, security selection, and sector selection within given markets, so choice C (I, II, and III only) is the correct answer. Indexing, however, is a passive portfolio management strategy and is not part of active portfolio management.

Question 20

Portfolio managers Paul Martin and Kevin Krueger each manage $1,000,000 funds.Paul Martin has perfect foresight and the call option value of his perfect foresight is $150,000.Kevin Krueger is an imperfect forecaster and correctly predicts 50% of all bull markets and 70% of all bear markets.The correct measure of timing ability for Kevin Krueger is __________.
A) 20%
B) 60%
C) 75%
D) 120%

Accepted Answer

The timing ability is calculated as the average of the correct predictions for bull and bear markets: (50% + 70%) / 2 = 60%.

Quiz 18: Portfolio Performance Evaluation

In the Treynor-Black model,the contribution of individual security to the active portfolio should be based primarily on the stock's _________.

Active portfolio managers try to construct a risky portfolio with _______.

The critical variable in the determination of the success of the active portfolio is the stock's __________.

The market timing form of active portfolio management relies on forecasting and the security selection form of active portfolio management relies on forecasting.

Stocks A and B have alphas of .01 and betas of .90.Stock A has a residual variance of .020 while stock B has a residual variance of .016.If stock A represents 2% of an active portfolio,stock B should represent __________ of an active portfolio.

The correct measure of timing ability is ____________ for a portfolio manager who correctly forecasts 55% of bull markets and 55% of bear markets.

A market timing strategy is one where asset allocation in the stock market __________ when one forecasts the stock market will outperform treasury bills.

Consider the theory of active portfolio management.Stocks A and B have the same positive alpha and the same nonsystematic risk.Stock A has a higher beta than stock B. You should want __________ in your active portfolio.

In performance measurement the bogey portfolio is designed to _________.

It is very hard to statistically verify abnormal fund performance because of all except which one of the following?

If all _ are _ in the Treynor-Black model,there would be no reason to depart from the passive portfolio.

Consider the theory of active portfolio management.Stocks A and B have the same beta and non-systematic risk.Stock A has higher positive alpha than stock B. You should want __________ in your active portfolio.

A mutual fund invests in large-capitalization stocks.Its performance should be measured against which one of the following?

In the Treynor-Black model,the weight of each analyzed security in the portfolio should be proportional to its __________.

A passive benchmark portfolio is _______________. I.a portfolio where the asset allocation across broad asset classes is neutral and not determined by forecasts of performance of the different asset classes II.one where an indexed portfolio is held within each asset class III.often called the bogey

______ portfolio manager(s) experience streaks of abnormal returns which are hard to label as lucky outcomes,and anomalies in realized returns have been sufficiently persistent such that portfolio managers could use them to beat a passive strategy over prolonged periods.

Active portfolio management consists of __________. I.market timing II.security selection III.sector selection within given markets IV.indexing