Deck 18: Portfolio Performance Evaluation

Question 1

Consider the Sharpe and Treynor performance measures.When a pension fund is large and well diversified in total and it has many managers,the __________ measure is better for evaluating individual managers while the __________ measure is better for evaluating the manager of a small fund with only one manager responsible for all investments that may not be fully diversified.

A) Sharpe; Sharpe
B) Sharpe; Treynor
C) Treynor; Sharpe
D) Treynor; Treynor

Answer 1

C

Question 2

The comparison universe is __________.

A) the bogey portfolio
B) a set of mutual funds with similar risk characteristics to your mutual fund
C) the set of all mutual funds in the U.S.A.
D) the set of all mutual funds in the world

Answer 2

B

Question 3

The risk free rate, average returns, standard deviations and betas for three funds and the S&P500 are given below.
Based on the example used in the book,a perfect market timer would have made _______ of dollars on a $1 investment between 1926 and 2008.

A) $100
B) $1,626
C) $1.5 million
D) $36.7 billion

Answer 3

D

Question 4

In a particular year, Salmon Arm Mutual Fund earned a return of 16% by making the following investments in asset classes: The return on a bogey portfolio was 12% calculated as follows:
The total excess return on the managed portfolio was __________.

A) 2%
B) 3%
C) 4%
D) 5%

Question 5

The average returns, standard deviations and betas for three funds are given below along with data for the S&P 500 index. The risk free return during the sample period is 6%.
You wish to evaluate the three mutual funds using the Treynor measure for performance evaluation.The fund with the highest Treynor measure of performance is __________.

A) Fund A
B) Fund B
C) Fund C
D) indeterminable

Question 6

The average returns, standard deviations and betas for three funds are given below along with data for the S&P 500 index. The risk free return during the sample period is 6%.
You wish to evaluate the three mutual funds using the Jensen measure for performance evaluation.The fund with the highest Jensen measure of performance is __________.

A) Fund A
B) Fund B
C) Fund C
D) S&P500

Question 7

Most professionally managed equity funds __________.

A) outperform the S&P 500 index on both raw and risk-adjusted return measures
B) outperform the S&P 500 index on raw return measures and underperform the S&P 500 index on risk-adjusted return measures
C) underperform the S&P 500 index on both raw and risk-adjusted return measures
D) underperform the S&P 500 index on raw return measures and outperform the S&P 500 index on risk-adjusted return measures

Question 8

A managed portfolio has a standard deviation equal to 22% and a beta of 0.9 when the market portfolio's standard deviation is 26%.The adjusted portfolio P* needed to calculate the M² measure will have ________ invested in the managed portfolio and the rest in T-bills.

A) 84.6%
B) 118%
C) 18%
D) 15.4%

Question 9

Your return will generally be higher using the __________ if you time your transactions poorly and your return will generally be higher using the __________ if you time your transactions well.

A) dollar-weighted return method; dollar-weighted return method
B) dollar-weighted return method; time-weighted return method
C) time-weighted return method; dollar-weighted return method
D) time-weighted return method; time-weighted return method

Question 10

Which one of the following performance measures is the Sharpe measure?

A) Average excess return to beta ratio
B) Average excess return to standard deviation ratio
C) Alpha to standard deviation of residuals ratio
D) Average return minus required return

Question 11

The risk free rate, average returns, standard deviations and betas for three funds and the S&P500 are given below.
What is the T² measure for portfolio A?

A) 12.4%
B) 2.38%
C) 0.91%
D) 3.64%

Question 12

The risk free rate, average returns, standard deviations and betas for three funds and the S&P500 are given below.
Which one of the following is largely based on forecasts of macroeconomic factors?

A) Security selection
B) Passive investing
C) Market efficiency
D) Market timing

Question 13

Suppose that over the same time period two portfolios have the same average return and the same standard deviation of return,but portfolio A has a higher beta than portfolio

A) is better than the performance of portfolio B
B) According to the Sharpe measure, the performance of portfolio A __________.
B) is the same as the performance of portfolio B
C) is poorer than the performance of portfolio B
D) cannot be measured since there is no data on the alpha of the portfolio

Question 14

The average returns, standard deviations and betas for three funds are given below along with data for the S&P 500 index. The risk free return during the sample period is 6%.
You wish to evaluate the three mutual funds using the Sharpe measure for performance evaluation.The fund with the highest Sharpe measure of performance is __________.

A) Fund A
B) Fund B
C) Fund C
D) indeterminable

Question 15

Henriksson found that,on average,betas of funds __________ during market advances.

A) decreased slightly
B) decreased very significantly
C) increased slightly
D) increased very significantly

Question 16

A mutual fund with a beta of 1.1 has outperformed the S&P500 over the last 20 years.We know that this mutual fund manager _______________________.

A) must have had superior stock selection ability
B) must have had superior asset allocation ability
C) must have had superior timing ability
D) may or may not have outperformed the S&P500 on a risk adjusted basis

Question 17

The risk free rate, average returns, standard deviations and betas for three funds and the S&P500 are given below.
What is the M² measure for portfolio B?

A) 0.43%
B) 1.25%
C) 1.77%
D) 1.43%

Question 18

The risk free rate, average returns, standard deviations and betas for three funds and the S&P500 are given below.
If these portfolios are subcomponents which make up part of a well diversified portfolio then portfolio ______ is preferred.

A) A
B) B
C) C
D) S&P500

Question 19

The risk free rate, average returns, standard deviations and betas for three funds and the S&P500 are given below.
Based on the M² measure,portfolio C has a superior return of _____ as compared to the S&P500.

A) -1.33%
B) 1.43%
C) 2.00%
D) 0.00%

Question 20

The M² measure is a variant of ________________.

A) the Sharpe measure
B) the Treynor measure
C) Jensen's alpha
D) the appraisal ratio

Question 21

In the Treynor-Black model security analysts __________.

A) analyze a relatively small number of stocks
B) analyze all stocks which are publicly traded
C) are redundant
D) devote their attention to market timing rather than fundamental analysis

Question 22

In a particular year, Lost Hope Mutual Fund made the following investments in asset classes:
The contribution of security selection within asset classes to the total extra return was __________.

A) -1%
B) 0%
C) 1%
D) 2%

Question 23

In a particular year, Salmon Arm Mutual Fund earned a return of 16% by making the following investments in asset classes: The return on a bogey portfolio was 12% calculated as follows:
The contribution of security selection within asset classes to the total excess return was __________.

A) 1.5%
B) 2.0%
C) 2.5%
D) 3.5%

Question 24

In the Treynor-Black model security analysts __________.

A) analyze the entire universe of stocks
B) assume that markets are inefficient
C) treat market index as a baseline portfolio upon which an active portfolio is constructed
D) focus on selecting the best performing bogey

Question 25

One hundred fund managers enter a contest to see how many times in thirteen years they can earn a higher return than their competitors.The probability distribution of the number of successful years out of thirteen for the best performing money managers is Out of this sample,chance alone would indicate that there is a ______ probability that someone would beat the market at least 11 times out of 13 years.

A) 51.3%
B) 65.9%
C) 67.1%
D) 10.83%

Question 26

The theory of efficient frontiers has __________.

A) no adherents among practitioners
B) a small number of adherents among practitioners
C) a significant number of adherents among practitioners
D) complete support by practitioners

Question 27

Recent analysis indicates that the style of investing is a critical component of fund performance.In fact on average about _____ of fund performance is attributable to the asset allocation decision.

A) 68%
B) 74%
C) 88%
D) 97%

Question 28

In a particular year, Lost Hope Mutual Fund made the following investments in asset classes:
The contribution of asset allocation across markets to the total extra return was __________.

A) -1%
B) 0%
C) 1%
D) 2%

Question 29

Perfect timing ability is equivalent to having __________ on the market portfolio.

A) a call option
B) a futures contract
C) a put option
D) a forward contract

Question 30

In creating the T² measure one mixes P* and T-bills to match the _____ of the market and in creating the M² measure one mixes P* and T-bills to match the _____ of the market.

A) alpha; beta
B) beta; alpha
C) beta; standard deviation
D) standard deviation; beta

Question 31

In a particular year, Salmon Arm Mutual Fund earned a return of 16% by making the following investments in asset classes: The return on a bogey portfolio was 12% calculated as follows:
The contribution of asset allocation across markets to the total excess return was __________.

A) 1.5%
B) 2.0%
C) 2.5%
D) 3.5%

Question 32

In a particular year, Lost Hope Mutual Fund made the following investments in asset classes:
The total extra return on the managed portfolio was __________.

A) 1%
B) 2%
C) 3%
D) 4%

Question 33

The M² measure of portfolio performance was developed by ______________.

A) Modigliani and Treynor
B) Modigliani and Modigliani
C) Merton and Miller
D) Fama and French

Question 34

Portfolio performance is often decomposed into various subcomponents such as the return due to ___________.
I)broad asset allocation across security classes
II)sector weightings within equity markets
III)security selection with a given sector
The one decision that contributes most to the fund performance is

A) I
B) II
C) III
D) All contribute equally to fund performance

Question 35

Which one of the following averaging methods is the preferred method of constructing returns series for use in evaluating portfolio performance?

A) Geometric average
B) Arithmetic average
C) Dollar-weighted
D) Internal

Question 36

Probably the biggest problem with evaluating portfolio performance of actively managed funds is the assumption that __________________________.

A) the markets are efficient
B) portfolio risk is constant over time
C) diversification pays off
D) security selection is more valuable than asset allocation

Question 37

The __________ calculates the reward to risk trade-off by dividing the average portfolio excess return by the portfolio beta.

A) Sharpe measure
B) Treynor measure
C) Jensen measure
D) appraisal ratio

Question 38

If an investor is a successful market timer,his distribution of monthly portfolio returns will __________.

A) be skewed to the left
B) be skewed to the right
C) exhibit kurtosis
D) exhibit neither skewness nor kurtosis

Question 39

In the Treynor-Black model,the active portfolio will contain stocks with __________.

A) alphas equal to zero
B) negative alphas
C) positive alphas
D) some negative and some positive alphas

Question 40

The Treynor-Black model is a model that shows how an investment manager can use security analysis and statistics to construct __________.

A) a market portfolio
B) a passive portfolio
C) an active portfolio
D) an index portfolio

Question 41

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

Question 42

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

Question 43

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

Question 44

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

Question 45

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

Question 46

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

Question 47

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%

Question 48

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%

Question 49

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

Question 50

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

A) equal proportions of stocks A and B
B) You should want __________ in your active portfolio.
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

Question 51

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

Question 52

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

Question 53

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

Question 54

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

A) equal proportions of stocks A and B
B) You should want __________ in your active portfolio.
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

Question 55

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

Question 56

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

Question 57

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

Question 58

__________ 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

Question 59

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

Question 60

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%

Question 61

The table presents the actual return of each sector of the manager's portfolio in column (1), the fraction of the portfolio allocated to each sector in column (2), the benchmark or neutral sector allocations in column (3), and the returns of sector indexes in column 4.
What was the manager's return in the month?

A) 2.07%
B) 2.21%
C) 2.24%
D) 4.80%

Question 62

The table presents the actual return of each sector of the manager's portfolio in column (1), the fraction of the portfolio allocated to each sector in column (2), the benchmark or neutral sector allocations in column (3), and the returns of sector indexes in column 4.
What was the bogey's return in the month?

A) 2.07%
B) 2.21%
C) 2.24%
D) 4.80%

Question 63

Assume you purchased a rental property for $100,000 and sold it one year later for $115,000 (there was no mortgage on the property).At the time of the sale,you paid $3,000 in commissions and $1,000 in taxes.If you received $10,000 in rental income (all received at the end of the year),what annual rate of return did you earn?

A) 6%
B) 11%
C) 20%
D) 25%

Question 64

A portfolio generates an annual return of 16%,a beta of 1.2 and a standard deviation of 19%.The market index return is 12% and has a standard deviation of 16%.What is the Treynor measure of the portfolio if the risk free rate is 6%?

A) .0833
B) .1083
C) .1114
D) .1163

Question 65

A portfolio generates an annual return of 16%,a beta of 1.2 and a standard deviation of 19%.The market index return is 12% and has a standard deviation of 16%.What is Jensen's alpha of the portfolio if the risk free rate is 6%?

A) .017
B) .028
C) .036
D) .078

Question 66

The table presents the actual return of each sector of the manager's portfolio in column (1), the fraction of the portfolio allocated to each sector in column (2), the benchmark or neutral sector allocations in column (3), and the returns of sector indexes in column 4.
What is the contribution of asset allocation to relative performance?

A) -0.18%
B) 0.18%
C) -0.15%
D) 0.15%

Question 67

An attribution analysis will NOT likely contain which of the following components?

A) Asset allocation
B) Index returns
C) Risk free returns
D) Security selection

Question 68

The appraisal ratio is equal to the stock's ____ divided by its ______.

A) diversifiable risk; beta
B) beta; alpha
C) alpha; beta
D) alpha; diversifiable risk

Question 69

A portfolio generates an annual return of 13%,a beta of 0.7 and a standard deviation of 17%.The market index return is 14% and has a standard deviation of 21%.What is Jensen's alpha of the portfolio if the risk free rate is 5%?

A) .017
B) .034
C) .067
D) .078

Question 70

A portfolio generates an annual return of 13%,a beta of 0.7 and a standard deviation of 17%.The market index return is 14% and has a standard deviation of 21%.What is the Sharpe measure of the portfolio if the risk free rate is 5%?

A) .3978
B) .4158
C) .4563
D) .4706

Question 71

A portfolio generates an annual return of 17%,a beta of 1.2 and a standard deviation of 19%.The market index return is 12% and has a standard deviation of 16%.What is the M² measure of the portfolio if the risk free rate is 4%?

A) 2.15%
B) 2.76%
C) 2.94%
D) 3.14%

Question 72

The Treynor-Black Model assumes security markets are _________.

A) completely efficient
B) nearly efficient
C) very inefficient
D) random walks

Question 73

The table presents the actual return of each sector of the manager's portfolio in column (1), the fraction of the portfolio allocated to each sector in column (2), the benchmark or neutral sector allocations in column (3), and the returns of sector indexes in column 4.
What was the manager's over or under performance for the month?

A) Under performance = 0.03%
B) Over performance = 0.03%
C) Over performance = 0.14%
D) Under performance = 3%

Question 74

A portfolio generates an annual return of 13%,a beta of 0.7 and a standard deviation of 17%.The market index return is 14% and has a standard deviation of 21%.What is the Treynor measure of the portfolio if the risk free rate is 5%?

A) .1143
B) .1233
C) .1354
D) .1477

Question 75

The table presents the actual return of each sector of the manager's portfolio in column (1), the fraction of the portfolio allocated to each sector in column (2), the benchmark or neutral sector allocations in column (3), and the returns of sector indexes in column 4.
What is the contribution of security selection to relative performance?

A) -0.15%
B) 0.15%
C) -0.3%
D) 0.3%

Question 76

A portfolio generates an annual return of 13%,a beta of 0.7 and a standard deviation of 17%.The market index return is 14% and has a standard deviation of 21%.What is the M² measure of the portfolio if the risk free rate is 5%?

A) 0.58%
B) 0.68%
C) 0.78%
D) 0.88%

Question 77

The portfolio that contains the benchmark asset allocation against which a manager will be measured is often called _____________.

A) the bogey portfolio
B) the Vanguard Index
C) Jensen's alpha
D) the Treynor measure

Question 78

Empirical tests to date show ______________.

A) that many investors have earned large rewards by market timing
B) little evidence of market timing ability
C) clear cut evidence of substantial market timing ability
D) evidence that absolutely no market timing ability exists

Question 79

Morningstar's RAR produce results which are similar but not identical to ________.

A) Jensen's alpha
B) M²
C) the Treynor ratio
D) the Sharpe ratio

Question 80

A portfolio generates an annual return of 16%,a beta of 1.2 and a standard deviation of 19%.The market index return is 12% and has a standard deviation of 16%.What is the Sharpe measure of the portfolio if the risk free rate is 6%?

A) .4757
B) .5263
C) .6842
D) .7252