Question 1

One year ago, Matt bought 100 shares of ACE Corp.stock for $5,619 including commission.He is about to sell the ACE stock for $6,528 net of commissions.When he made the purchase the S&P 500 index was at 907; now it is 1070.The beta of ACE stock is 0.98, and the market's risk-free rate is 4.0%.No dividends were paid.Based on Jensen's measure, did Matt make a good purchase?

Accepted Answer

The answer of One year ago, Matt bought 100 shares...

Question 2

A portfolio has a total return of 14.5%, a beta of 1.54, and a standard deviation of 17.6%.If the risk free rate is 4.5% and the market return is 10.2%, then Treynor's measure of this portfolio's performance is
A)2.8%
B)3.7%
C)6.5%
D)9.4%

Accepted Answer

The answer of A portfolio has a total return of...

Question 3

Allison's portfolio has an expected return of 14% and a standard deviation of 20%.Brianna's portfolio has an expected rate of return of 11% and a standard deviation of 12%.The risk-free rate is 3%.According to the Sharpe measure,
A)Allison has the better portfolio.
B)Brianna has the better portfolio.
C)the portfolio's are equally desirable.
D)the answer depends on Allison and Brianna's risk tolerance.

Accepted Answer

The Sharpe ratio is calculated as (Expected Portfolio Return - Risk-Free Rate) / Standard Deviation of Portfolio. For Allison, it's (14% - 3%) / 20% = 0.55. For Brianna, it's (11% - 3%) / 12% = 0.67. Since Brianna's Sharpe ratio is higher, her portfolio is considered better according to the Sharpe measure.

Question 4

Which of the following statements about Jensen's measure are correct?
I.Through its use of the capital asset pricing model, Jensen's measure automatically adjusts for market return.
II.In general, the higher the Jensen's measure, the better a portfolio has performed.
III.Jensen's measure is referred to as alpha.
IV.A positive Jensen's measure indicates an investment has underperformed the market on a risk-adjusted basis.
A)I and IV only
B)I, II and III only
C)II and III only
D)I, III and IV only

Accepted Answer

Jensen's measure, also known as alpha, evaluates the excess returns of a portfolio over the expected market returns, as predicted by the capital asset pricing model (CAPM). Therefore, it does adjust for market return (I), and a higher Jensen's measure indeed indicates better performance (II). Since it is referred to as alpha (III), these statements are correct. A positive Jensen's measure actually indicates that an investment has outperformed the market on a risk-adjusted basis, making statement IV incorrect.

Question 5

Which of the following is a "higher the better" measure?
A)only Sharpe's measure
B)only Treynor's measure
C)only Jensen's measure
D)All three are "higher the better" measures.

Accepted Answer

All three measures (Sharpe's, Treynor's and Jensen's) are "higher the better" measures. Sharpe's measures the excess return per unit of risk, Treynor's measures the excess return per unit of systematic risk, and Jensen's measures the excess return of a portfolio compared to its expected return based on a specific market model. In all cases, a higher value indicates better performance.

Question 6

Zachary holds 15 stocks in his portfolio.The portfolio's return last year was 11%, but one stock, RJH, doubled in value.What should Zachary do if he wants to be as diversified as he was at the beginning of the year?
A)Sell some of the RJH because it now constitutes a higher percentage of his holdings.
B)Sell the worst performing stock and use the proceeds to buy more RJH.
C)Wait for the price for RJH and the remaining stocks to rise so the proportions are reestablished.
D)Sell the RJH and buy a cheaper stock in the same industry.

Accepted Answer

With one stock (RJH) doubling in value, it now constitutes a higher percentage of Zachary's portfolio, making it less diversified. To maintain his original level of diversification, Zachary should consider selling some of the RJH stock to reinvest in other stocks.

Question 7

Allison's portfolio has an expected return of 14% and a beta of 1.37.Brianna's portfolio has an expected rate of return of 11% and a beta of 1.The risk-free rate is 3% and the expected rate of return on the market is 12%.According to the Jensen's measure,
A)Allison has the better portfolio.
B)Brianna has the better portfolio.
C)the portfolios are equally desirable.
D)the answer depends on Allison and Brianna's risk tolerance.

Accepted Answer

The answer of Allison's portfolio has an expected return of...

Question 8

Sharpe's measure of portfolio performance compares the risk premium on a portfolio to
A)a broad-based market index such as the S&P 500 index.
B)the portfolio's standard deviation of return.
C)the portfolio's beta.
D)the prevailing risk-free rate of return.

Accepted Answer

Sharpe's measure of portfolio performance compares the risk premium on a portfolio (the return of the portfolio minus the risk-free rate) to the portfolio's standard deviation of return. This ratio helps to understand how much excess return is being received for the extra volatility that an investor takes on by holding a risky asset.

Question 9

The process of selling certain issues in a portfolio and purchasing new ones to replace them is known as
A)portfolio revision.
B)market timing.
C)red herring baiting.
D)dollar cost averaging.

Accepted Answer

The process of selling certain issues in a portfolio and purchasing new ones to replace them is called portfolio revision. This is done in order to maintain the desired asset allocation and investment objectives. Market timing refers to the practice of buying and selling securities based on predictions of future market movements, while red herring baiting and dollar cost averaging are not related to this process.

Question 10

Treynor's measure of portfolio performance focuses on
A)nondiversifiable risk.
B)diversifiable risk.
C)total risk.
D)the standard deviation of the portfolio.

Accepted Answer

Treynor's measure of portfolio performance focuses on the nondiversifiable or systematic risk of a portfolio, as measured by the beta coefficient. It evaluates the return of a portfolio relative to its nondiversifiable risk, and is based on the assumption that investors are only concerned with being adequately compensated for the amount of risk taken on that cannot be diversified away. Therefore, choice A is the correct answer as it aligns with the concept of Treynor's measure.

Question 11

Ella's portfolio has a beta of 1.34 and a standard deviation of 16.4%.The portfolio has a total return of 14.8%.The market risk premium is 8.5%, while the return on the market portfolio was 12.0%.What is the value of Sharpe's measure for Ella's portfolio?
A)0.21
B)0.38
C)0.69
D)0.90

Accepted Answer

Sharpe's measure = (Portfolio return - Risk-free rate) / Portfolio standard deviation

First, we need to calculate the risk-free rate. Since it is not given, we can assume it to be the 3-month Treasury bill rate, which is commonly used as a proxy for risk-free rate.

Let's assume the 3-month Treasury bill rate is 1.5%.

Next, we can calculate the market return by adding the market risk premium to the risk-free rate:

Market return = Risk-free rate + Market risk premium = 1.5% + 8.5% = 10%

Now, we can calculate the excess return of Ella's portfolio over the risk-free rate:

Excess return = Portfolio return - Risk-free rate = 14.8% - 1.5% = 13.3%

Finally, we can apply Sharpe's measure formula:

Sharpe's measure = (Portfolio return - Risk-free rate) / Portfolio standard deviation
Sharpe's measure = Excess return / Portfolio standard deviation
Sharpe's measure = 13.3% / 16.4%
Sharpe's measure = 0.810

Therefore, the value of Sharpe's measure for Ella's portfolio is 0.81, which is closest to choice C (0.69).

Question 12

A portfolio has a total return of 14.4%, a standard deviation of 18.5% and a beta of 1.43.The risk free rate is 2.5%, the market rate of return is 11.4%, and the market's Treynor measure is 6.3.What is the value of the Treynor measure of this portfolio?
A)-1.9%
B).63 %
C)8.32%
D)27.4%

Accepted Answer

The Treynor measure is given by the formula:
(Total portfolio return - Risk free rate)/Beta
= (14.4% - 2.5%)/1.43
= 8.32%
Therefore, the value of the Treynor measure for this portfolio is 8.32%. Option C is the correct choice.

Question 13

A Jensen measure of 2.5% means that a security earned 2.5% more than the overall market.

Accepted Answer

A Jensen measure of 2.5% means that a security earned 2.5% more than what would be predicted by the Capital Asset Pricing Model (CAPM), taking into account the security's beta and the overall market return, not simply 2.5% more than the overall market.

Question 14

Which one of the following statements is correct if a portfolio has a Jensen measure of return of zero?
A)The portfolio has a total return of zero percent.
B)The portfolio earned exactly its expected return on a risk-adjusted basis.
C)The portfolio outperformed the market on a risk-adjusted basis.
D)The market provides a better return on a risk-adjusted basis.

Accepted Answer

A Jensen measure of return of zero means that the portfolio has earned exactly its expected return on a risk-adjusted basis. It does not necessarily mean the total return is zero, nor does it indicate whether the portfolio outperformed or underperformed the market.

Question 15

Portfolio revision is the ongoing process of systematically studying the issues in the portfolio and selling certain issues and purchasing others as the means of maintaining a portfolio that best meets the investor's objectives.

Accepted Answer

Portfolio revision is a process of regularly reviewing the portfolio and making necessary adjustments to ensure that it aligns with the investor's objectives. This involves selling some holdings and acquiring new ones based on factors such as market conditions, performance, risk, and expected returns. It is an essential part of investment management and requires a disciplined approach to ensure the portfolio remains relevant and effective in achieving the investor's goals.

Question 16

A portfolio has a total return of 10.5%, a beta of 0.72 and a standard deviation of 6.3%.The risk free rate is 3.8%, the market return is 12.4%.Jensen's measure of this portfolio's performance is
A)0.5%.
B)4.3%.
C)7.9%.
D)9.3%.

Accepted Answer

Jensen's Alpha is calculated as: α = Rp - [Rf + β(Rm - Rf)], where Rp is the portfolio return, Rf is the risk-free rate, β is the beta of the portfolio, and Rm is the market return. Plugging in the given values: α = 10.5% - [3.8% + 0.72(12.4% - 3.8%)] = 10.5% - [3.8% + 6.2%] = 10.5% - 10% = 0.5%.

Question 17

Which of the following are reasons to consider selling an investment that is currently in a portfolio?
I.The investment has met the original objective.
II.Better investment opportunities currently exist.
III.The outlook for the investment has improved.
IV.The investment has not met expectations and no change is expected.
A)I, II and IV only
B)I, III and IV only
C)I, II and III only
D)I, II, III and IV

Accepted Answer

Only options I and IV are valid reasons to consider selling an investment. Option II is a valid reason to consider reallocating funds from one investment to another, but not necessarily selling the current investment. Option III is not a reason to sell, but rather to hold or potentially even buy more of the investment.

Question 18

Phil has a portfolio with a 13.2% total return.The beta of the portfolio is 1.48 and the standard deviation is 13%.Currently, the risk-free rate of return is 4% and the overall market has a total return of 11%.What is the value of Treynor's measure for Phil's portfolio?
A)2.1%
B)6.2%
C)7.1%
D)8.9%

Accepted Answer

Treynor's measure is calculated as follows: (Portfolio Return - Risk-Free Rate) / Beta. 
Substituting the given values, we get: (13.2% - 4%) / 1.48 = 6.19%. Rounded to one decimal place, the answer is 6.2%. Therefore, the correct choice is B.

Question 19

The Sharpe's measure for Jane Smith's investment portfolio is 0.40, while the Sharpe's measure for the market is 0.30.This information suggests that Smith's portfolio
A)exhibits superior performance because its risk premium per unit of risk is above that of the market.
B)exhibits poor performance because its risk premium per unit of risk is below that of the market.
C)is inadequately diversified, and more securities should be added to the portfolio in order to bring it in line with the market.
D)is overly diversified, and some securities should be sold to bring the portfolio in line with the market.

Accepted Answer

A higher Sharpe's measure indicates a higher risk-adjusted return relative to the market. Therefore, Jane Smith's portfolio is exhibiting superior performance.

Question 20

Allison's portfolio has an expected return of 14% and a beta of 1.37.Brianna's portfolio has an expected rate of return of 11% and a beta of 1.The risk-free rate is 3%.According to the Treynor measure,
A)Allison has the better portfolio.
B)Brianna has the better portfolio.
C)the portfolio's are equally desirable.
D)the answer depends on Allison and Brianna's risk tolerance.

Accepted Answer

The answer of Allison's portfolio has an expected return of...

Quiz 13: Managing Your Own Portfolio

A portfolio has a total return of 14.5%, a beta of 1.54, and a standard deviation of 17.6%.If the risk free rate is 4.5% and the market return is 10.2%, then Treynor's measure of this portfolio's performance is

Allison's portfolio has an expected return of 14% and a standard deviation of 20%.Brianna's portfolio has an expected rate of return of 11% and a standard deviation of 12%.The risk-free rate is 3%.According to the Sharpe measure,

Which of the following is a "higher the better" measure?

Zachary holds 15 stocks in his portfolio.The portfolio's return last year was 11%, but one stock, RJH, doubled in value.What should Zachary do if he wants to be as diversified as he was at the beginning of the year?

Allison's portfolio has an expected return of 14% and a beta of 1.37.Brianna's portfolio has an expected rate of return of 11% and a beta of 1.The risk-free rate is 3% and the expected rate of return on the market is 12%.According to the Jensen's measure,

Sharpe's measure of portfolio performance compares the risk premium on a portfolio to

The process of selling certain issues in a portfolio and purchasing new ones to replace them is known as

Treynor's measure of portfolio performance focuses on

Ella's portfolio has a beta of 1.34 and a standard deviation of 16.4%.The portfolio has a total return of 14.8%.The market risk premium is 8.5%, while the return on the market portfolio was 12.0%.What is the value of Sharpe's measure for Ella's portfolio?

A portfolio has a total return of 14.4%, a standard deviation of 18.5% and a beta of 1.43.The risk free rate is 2.5%, the market rate of return is 11.4%, and the market's Treynor measure is 6.3.What is the value of the Treynor measure of this portfolio?

A Jensen measure of 2.5% means that a security earned 2.5% more than the overall market.

Which one of the following statements is correct if a portfolio has a Jensen measure of return of zero?

Portfolio revision is the ongoing process of systematically studying the issues in the portfolio and selling certain issues and purchasing others as the means of maintaining a portfolio that best meets the investor's objectives.

A portfolio has a total return of 10.5%, a beta of 0.72 and a standard deviation of 6.3%.The risk free rate is 3.8%, the market return is 12.4%.Jensen's measure of this portfolio's performance is

Phil has a portfolio with a 13.2% total return.The beta of the portfolio is 1.48 and the standard deviation is 13%.Currently, the risk-free rate of return is 4% and the overall market has a total return of 11%.What is the value of Treynor's measure for Phil's portfolio?

The Sharpe's measure for Jane Smith's investment portfolio is 0.40, while the Sharpe's measure for the market is 0.30.This information suggests that Smith's portfolio

Allison's portfolio has an expected return of 14% and a beta of 1.37.Brianna's portfolio has an expected rate of return of 11% and a beta of 1.The risk-free rate is 3%.According to the Treynor measure,