Question 1

Morningstar's RAR methodI) is one of the most widely-used performance measures.II) indicates poor performance by placing up to 5 darts next to the fund's name.III) computes fund returns adjusted for loads.IV) computes fund returns adjusted for risk.V) produces ranking results that are the same as those produced with the Sharpe measure.
A) I, II, and IV
B) I, III, and IV
C) I, IV, and V
D) I, II, IV, and V
E) I, II, III, IV, and V

Accepted Answer

Morningstar's Risk-Adjusted Return (RAR) method is widely used to evaluate the performance of mutual funds and other investments. It adjusts fund returns for risk, making it possible to compare the performance of funds with different risk levels. It also adjusts for loads, which are fees charged when buying or selling shares of a fund, providing a clearer picture of a fund's underlying performance. The method does not use darts to indicate poor performance, nor does it necessarily produce rankings that are the same as those produced with the Sharpe ratio, which is another measure of risk-adjusted return.

Question 2

The comparison universe is not
A) a concept found only in astronomy.
B) the set of all mutual funds in the world.
C) the set of all mutual funds in the U.S.
D) a set of mutual funds with similar risk characteristics to your mutual fund.
E) a concept found only in astronomy, the set of all mutual funds in the world, or the set of all mutual funds in the U.S.

Accepted Answer

The comparison universe refers to a specific set of items, entities, or data points that are used as a benchmark or reference to evaluate or compare similar items, entities, or data points. It is not exclusive to any single field such as astronomy or limited to all mutual funds globally or in the U.S. Instead, it can be applied in various contexts, including finance, where it might refer to a set of mutual funds with similar risk characteristics for comparison purposes.

Question 3

Suppose you purchase 100 shares of Coca Cola stock at the beginning of year 1 and purchase another 100 shares at the end of year 1. You sell all 200 shares at the end of year 2. Assume that the price of Coca Cola stock is $50 at the beginning of year 1, $55 at the end of year 1, and $65 at the end of year 2. Assume no dividends were paid on Coca Cola stock. Your dollar-weighted return on the stock will be __________ your time-weighted return on the stock.
A) higher than
B) the same as
C) less than
D) exactly proportional to
E) More information is necessary to answer this question.

Accepted Answer

The dollar-weighted return considers the timing of cash flows, so buying more shares at a higher price ($55) and selling at $65 results in a higher return compared to the time-weighted return, which averages the returns over the periods without considering cash flow timing.

Question 4

Suppose two portfolios have the same average return and the same standard deviation of returns, but Buckeye Fund has a lower beta than Wild Cat Fund. According to the Sharpe measure, the performance of Buckeye Fund
A) is better than the performance of Wild Cat Fund.
B) is the same as the performance of Wild Cat Fund.
C) is poorer than the performance of Wild Cat Fund.
D) cannot be measured as there are no data on the alpha of the portfolio.

Accepted Answer

The Sharpe measure evaluates performance based on return and standard deviation, not beta. Since both portfolios have the same average return and standard deviation, their Sharpe ratios are the same.

Question 5

Suppose two portfolios have the same average return and the same standard deviation of returns, but portfolio A has a higher beta than portfolio B. According to the Sharpe measure, the performance of portfolio A
A) is better than the performance of portfolio B.
B) is the same as the performance of portfolio B.
C) is poorer than the performance of portfolio B.
D) cannot be measured as there are no data on the alpha of the portfolio.
E) None of the options are correct.

Accepted Answer

The Sharpe ratio measures the performance of an investment compared to a risk-free asset, after adjusting for its risk. It is calculated as the difference between the returns of the investment and the risk-free return, divided by the standard deviation of the investment returns. Since both portfolios have the same average return and the same standard deviation of returns, their Sharpe ratios would be the same, regardless of their betas. Beta measures systematic risk, not the risk-adjusted return, which is what the Sharpe ratio evaluates.

Question 6

Suppose two portfolios have the same average return and the same standard deviation of returns, but Buckeye Fund has a lower beta than Wild Cat Fund. According to the Treynor measure, the performance of Buckeye Fund
A) is better than the performance of Wild Cat Fund.
B) is the same as the performance of Wild Cat Fund.
C) is poorer than the performance of Wild Cat Fund.
D) cannot be measured as there are no data on the alpha of the portfolio.
E) None of the options are correct.

Accepted Answer

The Treynor measure evaluates a portfolio's excess return per unit of risk, using beta as the risk measure. Since Buckeye Fund has a lower beta (indicating lower market risk) but the same average return as Wild Cat Fund, it has a higher Treynor measure, indicating better performance.

Question 7

Suppose two portfolios have the same average return and the same standard deviation of returns, but Buckeye Fund has a higher beta than Wild Cat Fund. According to the Treynor measure, the performance of Buckeye Fund
A) is better than the performance of Wild Cat Fund.
B) is the same as the performance of Wild Cat Fund.
C) is poorer than the performance of Wild Cat Fund.
D) cannot be measured as there are no data on the alpha of the portfolio.
E) None of the options are correct.

Accepted Answer

The Treynor measure evaluates the returns of a portfolio relative to its beta (market risk). A higher beta indicates more risk. If two portfolios have the same average return but one has a higher beta, the one with the higher beta (Buckeye Fund) is considered to have poorer performance according to the Treynor measure because it achieves the same return with more risk.

Question 8

The comparison universe is
A) a concept found only in astronomy.
B) the set of all mutual funds in the world.
C) the set of all mutual funds in the U.S.
D) a set of mutual funds with similar risk characteristics to your mutual fund.
E) None of the options are correct.

Accepted Answer

The comparison universe refers to a set of mutual funds that share similar risk characteristics to a specific mutual fund, allowing for a meaningful comparison of performance among them.

Question 9

Suppose the risk-free return is 3%. The beta of a managed portfolio is 1.75, the alpha is 0%, and the average return is 16%. Based on Jensen's measure of portfolio performance, you would calculate the return on the market portfolio as
A) 12.3%.
B) 10.4%.
C) 15.1%.
D) 16.7%.

Accepted Answer

Jensen's alpha is calculated as: Actual Portfolio Return - [Risk-Free Rate + Beta * (Market Return - Risk-Free Rate)]. Given the alpha is 0%, we can set up the equation as 0% = 16% - [3% + 1.75 * (Market Return - 3%)]. Solving for the Market Return gives us 10.4%.

Question 10

Henriksson (1981) found that, on average, betas of funds __________ during market advances.
A) increased very significantly
B) increased slightly
C) decreased slightly
D) decreased very significantly
E) did not change

Accepted Answer

Betas of funds tend to decrease slightly during market advances because the underlying stocks in the funds tend to become less volatile relative to the market as a whole.

Question 11

Suppose two portfolios have the same average return and the same standard deviation of returns, but portfolio A has a higher beta than portfolio B. According to the Treynor measure, the performance of portfolio A
A) is better than the performance of portfolio B.
B) is the same as the performance of portfolio B.
C) is poorer than the performance of portfolio B.
D) cannot be measured as there are no data on the alpha of the portfolio.
E) None of the options are correct.

Accepted Answer

The Treynor measure evaluates the returns of a portfolio relative to its beta (market risk). A higher beta indicates higher risk. If two portfolios have the same average return but one has a higher beta, the one with the higher beta (Portfolio A) is considered to have poorer performance according to the Treynor measure because it achieves the same return with higher risk.

Question 12

Most professionally managed equity funds generally
A) outperform the S&P 500 Index on both raw and risk-adjusted return measures.
B) underperform the S&P 500 Index on both raw and risk-adjusted return measures.
C) outperform the S&P 500 Index on raw return measures and underperform the S&P 500 Index on 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.
E) match the performance of the S&P 500 Index on both raw and risk-adjusted return measures.

Accepted Answer

Most professionally managed equity funds tend to underperform the S&P 500 Index on both raw and risk-adjusted return measures, largely due to fees, expenses, and the difficulty of consistently outperforming the market.

Question 13

Suppose two portfolios have the same average return and the same standard deviation of returns, but Roll Tide Fund has a higher beta than Arc Fund. According to the Sharpe measure, the performance of Roll Tide Fund
A) is better than the performance of Arc Fund.
B) is the same as the performance of Arc Fund.
C) is poorer than the performance of Arc Fund.
D) cannot be measured as there are no data on the alpha of the portfolio.

Accepted Answer

The Sharpe ratio measures the performance of an investment compared to a risk-free asset, after adjusting for its risk. It is calculated as the difference between the returns of the investment and the risk-free return, divided by the standard deviation of the investment returns. Since both portfolios have the same average return and the same standard deviation of returns, their Sharpe ratios would be the same, regardless of their betas. Beta measures systematic risk, not the risk-adjusted return, which is what the Sharpe ratio is concerned with.

Question 14

Suppose two portfolios have the same average return and the same standard deviation of returns, but portfolio A has a lower beta than portfolio B. According to the Treynor measure, the performance of portfolio A
A) is better than the performance of portfolio B.
B) is the same as the performance of portfolio B.
C) is poorer than the performance of portfolio B.
D) cannot be measured as there are no data on the alpha of the portfolio.
E) None of the options are correct.

Accepted Answer

The Treynor measure evaluates the returns earned in excess of the risk-free rate per unit of market risk (beta). A lower beta for the same level of return means a higher Treynor measure, indicating better performance for Portfolio A compared to Portfolio B.

Question 15

__________ developed a popular method for risk-adjusted performance evaluation of mutual funds.
A) Eugene Fama
B) Michael Jensen
C) William Sharpe
D) Jack Treynor
E) Michael Jensen, William Sharpe, and Jack Treynor

Accepted Answer

Michael Jensen, William Sharpe, and Jack Treynor are all credited with developing methods for the risk-adjusted performance evaluation of mutual funds. Jensen's alpha, the Sharpe ratio, and the Treynor ratio are widely used metrics in finance for assessing the performance of investment portfolios, taking into account their risk.

Question 16

Suppose two portfolios have the same average return and the same standard deviation of returns, but Roll Tide Fund has a lower beta than Arc Fund. According to the Treynor measure, the performance of Roll Tide Fund
A) is better than the performance of Arc Fund.
B) is the same as the performance of Arc Fund.
C) is poorer than the performance of Arc Fund.
D) cannot be measured as there are no data on the alpha of the portfolio.

Accepted Answer

The Treynor measure evaluates the returns earned in excess of the risk-free rate per unit of market risk (beta). Since Roll Tide Fund has a lower beta than Arc Fund, it means Roll Tide Fund is taking on less market risk for the same level of return, thus indicating a better performance according to the Treynor measure.

Question 17

Suppose the risk-free return is 4%. The beta of a managed portfolio is 1.2, the alpha is 1%, and the average return is 14%. Based on Jensen's measure of portfolio performance, you would calculate the return on the market portfolio as
A) 11.5%.
B) 14%.
C) 15%.
D) 16%.

Accepted Answer

Jensen's measure of portfolio performance is given by:Jensen's alpha = Portfolio return - (Risk-free return + Beta * (Market return - Risk-free return))Substituting the given values, we get:1% = 14% - (4% + 1.2 * (Market return - 4%))Solving for the market return, we get:Market return = 15%

Question 18

Suppose two portfolios have the same average return and the same standard deviation of returns, but Buckeye Fund has a higher beta than Wild Cat Fund. According to the Sharpe measure, the performance of Buckeye Fund
A) is better than the performance of Wild Cat Fund.
B) is the same as the performance of Wild Cat Fund.
C) is poorer than the performance of Wild Cat Fund.
D) cannot be measured as there are no data on the alpha of the portfolio.

Accepted Answer

The Sharpe ratio measures the performance of an investment compared to a risk-free asset, after adjusting for its risk. It is calculated as the difference between the returns of the investment and the risk-free return, divided by the standard deviation of the investment returns. Since both funds have the same average return and the same standard deviation of returns, their Sharpe ratios would be the same, assuming the risk-free rate is constant for both. The beta of the fund, which measures its volatility relative to the market, does not affect the Sharpe ratio calculation directly.

Question 19

Suppose two portfolios have the same average return and the same standard deviation of returns, but Roll Tide Fund has a higher beta than Arc Fund. According to the Treynor measure, the performance of Roll Tide Fund
A) is better than the performance of Arc Fund.
B) is the same as the performance of Arc Fund.
C) is poorer than the performance of Arc Fund.
D) cannot be measured as there are no data on the alpha of the portfolio.

Accepted Answer

The Treynor measure evaluates the returns earned in excess of the risk-free rate per unit of market risk (beta). A higher beta indicates more risk without necessarily more return, thus a lower Treynor measure, indicating poorer performance.

Question 20

Mutual funds show ____________ evidence of serial correlation, and hedge funds show ____________ evidence of serial correlation.
A) almost no; almost no
B) almost no; substantial
C) substantial; substantial
D) substantial; almost no
E) modest; modest

Accepted Answer

Mutual funds generally show almost no evidence of serial correlation, meaning their returns are not significantly predictable from one period to the next. Hedge funds, on the other hand, often exhibit substantial evidence of serial correlation, suggesting that their returns can be somewhat predictable based on past performance.

Quiz 24: Portfolio Performance Evaluation

The comparison universe is not

Suppose two portfolios have the same average return and the same standard deviation of returns, but Buckeye Fund has a lower beta than Wild Cat Fund. According to the Sharpe measure, the performance of Buckeye Fund

Suppose two portfolios have the same average return and the same standard deviation of returns, but portfolio A has a higher beta than portfolio B. According to the Sharpe measure, the performance of portfolio A

Suppose two portfolios have the same average return and the same standard deviation of returns, but Buckeye Fund has a lower beta than Wild Cat Fund. According to the Treynor measure, the performance of Buckeye Fund

Suppose two portfolios have the same average return and the same standard deviation of returns, but Buckeye Fund has a higher beta than Wild Cat Fund. According to the Treynor measure, the performance of Buckeye Fund

The comparison universe is

Suppose the risk-free return is 3%. The beta of a managed portfolio is 1.75, the alpha is 0%, and the average return is 16%. Based on Jensen's measure of portfolio performance, you would calculate the return on the market portfolio as

Henriksson (1981) found that, on average, betas of funds __________ during market advances.

Suppose two portfolios have the same average return and the same standard deviation of returns, but portfolio A has a higher beta than portfolio B. According to the Treynor measure, the performance of portfolio A

Most professionally managed equity funds generally

Suppose two portfolios have the same average return and the same standard deviation of returns, but Roll Tide Fund has a higher beta than Arc Fund. According to the Sharpe measure, the performance of Roll Tide Fund

Suppose two portfolios have the same average return and the same standard deviation of returns, but portfolio A has a lower beta than portfolio B. According to the Treynor measure, the performance of portfolio A

__________ developed a popular method for risk-adjusted performance evaluation of mutual funds.

Suppose two portfolios have the same average return and the same standard deviation of returns, but Roll Tide Fund has a lower beta than Arc Fund. According to the Treynor measure, the performance of Roll Tide Fund

Suppose the risk-free return is 4%. The beta of a managed portfolio is 1.2, the alpha is 1%, and the average return is 14%. Based on Jensen's measure of portfolio performance, you would calculate the return on the market portfolio as

Suppose two portfolios have the same average return and the same standard deviation of returns, but Buckeye Fund has a higher beta than Wild Cat Fund. According to the Sharpe measure, the performance of Buckeye Fund

Suppose two portfolios have the same average return and the same standard deviation of returns, but Roll Tide Fund has a higher beta than Arc Fund. According to the Treynor measure, the performance of Roll Tide Fund

Mutual funds show evidence of serial correlation, and hedge funds show evidence of serial correlation.