Question 1

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, which can be achieved by selecting securities that may have higher expected returns or by controlling risk levels more efficiently.

Question 2

Benchmark risk
A)is inevitable and is never a significant issue in practice.
B)is inevitable and is always a significant issue in practice.
C)cannot be constrained to keep a Treynor-Black portfolio within reasonable weights.
D)can be constrained to keep a Treynor-Black portfolio within reasonable weights.

Accepted Answer

Benchmark risk refers to the risk that a portfolio deviates from its benchmark index. While it is inevitable, it can be constrained through portfolio construction techniques such as the Treynor-Black model to keep the portfolio within reasonable weights relative to the benchmark. Therefore, the best choice is D as it is the only option that accurately reflects the ability to constrain benchmark risk.

Question 3

If you begin with a ______ and obtain additional data from an experiment, you can form a ______.
A)posterior distribution; prior distribution
B)prior distribution; posterior distribution
C)tight posterior; Bayesian analysis
D)tight prior; Bayesian analysis

Accepted Answer

Starting with a prior distribution and obtaining additional data from an experiment allows for the formation of a posterior distribution through Bayesian analysis.

Question 4

The Black-Litterman model is geared toward ____________ while the Treynor-Black model is geared toward ____________.
A)security analysis; security analysis
B)asset allocation; asset allocation
C)security analysis; asset allocation
D)asset allocation; security analysis

Accepted Answer

The Black-Litterman model is primarily used for asset allocation, while the Treynor-Black model is geared toward security analysis.

Question 5

If a portfolio manager consistently obtains a high Sharpe measure, the manager's forecasting ability
A)is above average.
B)is average.
C)is below average.
D)does not exist.

Accepted Answer

A high Sharpe measure indicates that the portfolio manager is generating excess returns relative to the level of risk taken, implying that their forecasting and risk management abilities are above average.

Question 6

The Black-Litterman model and Treynor-Black model are
A)nice in theory but practically useless in modern portfolio management.
B)complementary tools that should be used in portfolio management.
C)contradictory models that cannot be used together.Therefore, portfolio managers must choose which one suits their needs.
D)not useful due to their complexity.

Accepted Answer

The Black-Litterman model and the Treynor-Black model are complementary tools that are often used together in modern portfolio management to enhance the accuracy of returns estimation and asset allocation decisions.

Question 7

Active portfolio management consists of
A)market timing.
B)security analysis.
C)indexing.
D)market timing and security analysis.

Accepted Answer

Active portfolio management involves both market timing and security analysis in order to identify undervalued securities and take advantage of market fluctuations. While indexing involves creating a portfolio that mirrors a specific market index, active management aims to outperform the market through strategic buying and selling of securities. Therefore, the best choice is D, market timing and security analysis.

Question 8

Even low-quality forecasts have proven to be valuable because R-squares of only ____________ in regressions of analysts' forecasts can be used to substantially improve portfolio performance.
A)0.656
B)0.452
C)0.258
D)0.153
E)0.001

Accepted Answer

R-squares as low as 0.001 in regressions of analysts' forecasts can still be used to substantially improve portfolio performance, indicating that even low-quality forecasts can provide value.

Question 9

____________ can be used to measure forecast quality and guide in the proper adjustment of forecasts.
A)Regression analysis
B)Exponential smoothing
C)ARIMA
D)Moving average models

Accepted Answer

Regression analysis is used to measure forecast quality and guide in the proper adjustment of forecasts.

Question 10

In the Treynor-Black model,
A)portfolio weights are sensitive to large alpha values, which can lead to infeasible long or short positions for many portfolio managers.
B)portfolio weights are not sensitive to large alpha values, which can lead to infeasible long or short positions for many portfolio managers.
C)portfolio weights are sensitive to large alpha values, which can lead to the optimal portfolio for most portfolio managers.
D)portfolio weights are not sensitive to large alpha values, which can lead to the optimal portfolio for most portfolio managers.

Accepted Answer

The Treynor-Black model is a portfolio optimization model that aims to achieve the highest return for a given level of risk. It takes into account both the expected returns and the covariance matrix of securities in the portfolio. However, it has been criticized for being sensitive to large alpha values, which can lead to infeasible long or short positions for many portfolio managers. Therefore, choice A is the best answer as it accurately describes the sensitivity of portfolio weights to large alpha values in the Treynor-Black model.

Question 11

Passive portfolio management consists of
A)market timing.
B)security analysis.
C)indexing.
D)market timing and security analysis.

Accepted Answer

Passive portfolio management involves indexing, which means buying and holding a diversified portfolio of securities that tracks a particular market index. It does not involve market timing or security analysis, which are strategies used in active portfolio management.

Question 12

Tracking error is defined as
A)the difference between the returns on the overall risky portfolio versus the benchmark return.
B)the variance of the return of the benchmark portfolio.
C)the variance of the return difference between the portfolio and the benchmark.
D)the variance of the return of the actively-managed portfolio.

Accepted Answer

The answer of Tracking error is defined as
A)the difference between...

Question 13

Benchmark risk is defined as
A)the return difference between the portfolio and the benchmark.
B)the standard deviation of the return of the benchmark portfolio.
C)the standard deviation of the return difference between the portfolio and the benchmark.
D)the standard deviation of the return of the actively-managed portfolio.

Accepted Answer

Benchmark risk is the risk that an investor takes on by deviating from the benchmark portfolio. It is represented by the standard deviation of the return difference between the portfolio and the benchmark. Option A is incorrect as it defines active return. Option B is incorrect as it defines the risk of the benchmark portfolio. Option D is incorrect as it defines the risk of the actively-managed portfolio.

Question 14

Alpha forecasts must be ____________ to account for less-than-perfect forecasting quality.When alpha forecasts are ____________ to account for forecast imprecision, the resulting portfolio position becomes ____________.
A)shrunk; shrunk; far less moderate
B)shrunk; shrunk; far more moderate
C)grossed up; grossed up; far less moderate
D)grossed up; grossed up; far more moderate

Accepted Answer

Alpha forecasts must be shrunk to account for less-than-perfect forecasting quality. When alpha forecasts are also shrunk to account for forecast imprecision, the resulting portfolio position becomes far more moderate. Therefore, the best choice is B.

Question 15

The Treynor-Black model requires estimates of
A)alpha/beta.
B)alpha/beta/residual variance.
C)beta/residual variance.
D)alpha/residual variance.

Accepted Answer

The Treynor-Black model requires estimates of alpha (excess return), beta (market risk), and residual variance (idiosyncratic risk) in order to construct an optimal portfolio. Therefore, choice B is the best choice, as it includes all three required estimates.

Question 16

The critical variable in the determination of the success of the active portfolio is
A)alpha/systematic risk.
B)alpha/nonsystematic risk.
C)gamma/systematic risk.
D)gamma/nonsystematic risk.

Accepted Answer

The critical variable in the determination of the success of the active portfolio is alpha, which is the excess return above that of the benchmark. The success of the portfolio is dependent on the skill of the portfolio manager in identifying mispricings in the market to generate a positive alpha. Nonsystematic risk, which is the risk specific to an individual security or company, is also important as it can be diversified away through proper portfolio management. Systematic risk, such as market risk or interest rate risk, is not as important as it cannot be diversified away. Gamma, which is the measure of the change in an option's delta given a one-point move in the underlying asset, is not relevant to the success of an active portfolio.

Question 17

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.

Accepted Answer

The Treynor-Black model is used to construct an active portfolio. It combines security analysis with statistical analysis to create a portfolio that aims to outperform the market. The other choices (A, B, and D) are not directly related to the Treynor-Black model. A market portfolio is a portfolio that contains all the securities in the relevant market, a passive portfolio is a portfolio that seeks to replicate the performance of a specific index or benchmark, and an index portfolio is a type of passive portfolio that tracks an index.

Question 18

Absent research, you should assume the alpha of a stock is
A)zero.
B)positive.
C)negative.
D)not zero.

Accepted Answer

In the absence of research or additional information, the most conservative and neutral assumption to make about a stock's alpha is that it is zero. This means you assume the stock will perform in line with the market expectations, neither outperforming (positive alpha) nor underperforming (negative alpha) the market.

Question 19

The tracking error of an optimized portfolio can be expressed in terms of the ____________ of the portfolio, and thus reveals ____________.
A)return; portfolio performance
B)total risk; portfolio performance
C)beta; portfolio performance
D)beta; benchmark risk

Accepted Answer

The tracking error of an optimized portfolio can be expressed in terms of the beta of the portfolio, and thus reveals the benchmark risk of the portfolio. Therefore, option D is the correct answer. Choice A is incorrect because the tracking error is not an indicator of portfolio performance but rather a measure of how closely the portfolio follows a benchmark. Choice B is also incorrect because total risk refers to the overall risk of the portfolio, whereas the tracking error specifically measures the deviation from the benchmark. Choice C is partially correct because beta is a measure of systematic risk, but it is not a measure of portfolio performance, which is what the question is asking for.

Question 20

The ____________ model allows the private views of the portfolio manager to be incorporated with market data in the optimization procedure.
A)Black-Litterman
B)Treynor-Black
C)Treynor-Mazuy
D)Black-Scholes

Accepted Answer

The Black-Litterman model allows the manager's views to be incorporated into the optimization procedure.

Quiz 27: The Theory of Active Portfolio Management

Active portfolio managers try to construct a risky portfolio with

Benchmark risk

If you begin with a and obtain additional data from an experiment, you can form a .

The Black-Litterman model is geared toward while the Treynor-Black model is geared toward .

If a portfolio manager consistently obtains a high Sharpe measure, the manager's forecasting ability

The Black-Litterman model and Treynor-Black model are

Active portfolio management consists of

Even low-quality forecasts have proven to be valuable because R-squares of only ____________ in regressions of analysts' forecasts can be used to substantially improve portfolio performance.

____________ can be used to measure forecast quality and guide in the proper adjustment of forecasts.

In the Treynor-Black model,

Passive portfolio management consists of

Tracking error is defined as

Benchmark risk is defined as

Alpha forecasts must be to account for less-than-perfect forecasting quality.When alpha forecasts are to account for forecast imprecision, the resulting portfolio position becomes .

The Treynor-Black model requires estimates of

The critical variable in the determination of the success of the active portfolio is

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

Absent research, you should assume the alpha of a stock is

The tracking error of an optimized portfolio can be expressed in terms of the of the portfolio, and thus reveals .

The ____________ model allows the private views of the portfolio manager to be incorporated with market data in the optimization procedure.