Question 1

You want to evaluate three mutual funds using the Sharpe measure for performance evaluation.The risk-free return during the sample period is 4%.The average returns,standard deviations and betas for the three funds are given below,as is the data for the S&P 500 index. $$\begin{array} { | l | l | l | l | } 
\hline & \text { Average Return } & \text { Standard. Deviation } & \text { Beta } \
\hline \text { Fund A } & 18 \% & 38 \% & 1.6 \
\hline \text { Fund B } & 15 \% & 27 \% & 1.3 \
\hline \text { Fund C } & 11 \% & 24 \% & 1.0 \
\hline \text { S\&P 500 } & 10 \% & 22 \% & 1.0 \
\hline
\end{array}$$ The fund with the highest Sharpe measure is __________.

Accepted Answer

The Sharpe measure is calculated as (Average Return - Risk-Free Rate) / Standard Deviation. Fund B has the highest Sharpe ratio: (15% - 4%) / 27% = 0.407, compared to Fund A: (18% - 4%) / 38% = 0.368 and Fund C: (11% - 4%) / 24% = 0.292.

Question 2

Suppose you purchase one share of the stock of Volatile Engineering Corporation at the beginning of year 1 for $36.At the end of year 1,you receive a $2 dividend,and buy one more share for $30.At the end of year 2,you receive total dividends of $4 (i.e.,$2 for each share),and sell the shares for $36.45 each.The dollar-weighted return on your investment is _______.

Accepted Answer

The answer of Suppose you purchase one share of the...

Question 3

You want to evaluate three mutual funds using the Jensen measure for performance evaluation.The risk-free return during the sample period is 6%,and the average return on the market portfolio is 18%.The average returns,standard deviations,and betas for the three funds are given below. $$\begin{array} { | l | l | l | l | } 
\hline & \text { Average Return } & \text { Standard. Deviation } & \text { Beta } \
\hline \text { Fund } \mathrm { A } & 17.6 \% & 10 ^ { \circ } \% & 1.2 \
\hline \text { Fund B } & 17.5 ^ { \circ } \% & 20 ^ { \circ } \% & 1.0 \
\hline \text { Fund C } & 17.4 ^ { \circ } \% & 30 ^ { \circ } \% & 0.8 \
\hline
\end{array}$$ The fund with the highest Jensen measure is __________.

Accepted Answer

The answer of You want to evaluate three mutual funds...

Question 4

Suppose you purchase one share of the stock of Volatile Engineering Corporation at the beginning of year 1 for $36.At the end of year 1,you receive a $2 dividend,and buy one more share for $30.At the end of year 2,you receive total dividends of $4 (i.e.,$2 for each share),and sell the shares for $36.45 each.The time-weighted return on your investment is ________.

Accepted Answer

Year 1:

- Purchased 1 share at $36.
- Received a $2 dividend.

Year 2:

- Purchased 1 more share at $30.
- Received $4 in dividends ($2 per share).
- Sold 2 shares for a total of $72.90 ($36.45 per share).

To calculate the time-weighted return, we need to calculate the total return and the annualize it:

Total return = ($72.90 + $2 + $4) / ($36 + $30) - 1 = 1.5263

Annualized return = (1 + total return)^(1/2) - 1 = 0.0853 or 8.53%

Therefore, the answer is C) 8.53%.

Question 5

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

Accepted Answer

The answer of Suppose the risk-free return is 3%.The beta...

Question 6

You want to evaluate three mutual funds using the Sharpe measure for performance evaluation.The risk-free return during the sample period is 5%.The average returns,standard deviations and betas for the three funds are given below,as is the data for the S&P 500 index. $$\begin{array} { | l | l | l | l | } 
\hline & \text { Average Return } & \text { Standard. Deviation } & \text { Beta } \
\hline \text { Fund A } & 23 \% & 30 \% & 1.3 \
\hline \text { Fund B } & 20 \% & 19 \% & 1.2 \
\hline \text { Fund C } & 19 \% & 17 \% & 1.1 \
\hline \text { S\&P 500 } & 18 \% & 15 \% & 1.0 \
\hline
\end{array}$$ The investment with the highest Sharpe measure is __________.

Accepted Answer

The answer of You want to evaluate three mutual funds...

Question 7

Suppose you own two stocks,A and B.In year 1,stock A earns a 2% return and stock B earns a 9% return.In year 2,stock A earns an 18% return and stock B earns an 11% return.__________ has the higher arithmetic average return.

Accepted Answer

The answer of Suppose you own two stocks,A and B.In...

Question 8

Suppose you buy 100 shares of Abolishing Dividend Corporation at the beginning of year 1 for $80.Abolishing Dividend Corporation pays no dividends.The stock price at the end of year 1 is $100,$120 at the end of year 2,and $150 at the end of year 3.The stock price declines to $100 at the end of year 4,and you sell your 100 shares.For the four years,your geometric average return is

Accepted Answer

First, we need to determine the annual rate of return for each year using the formula: 
Annual return = (Ending price/Beginning price)^(1/number of years)-1

Year 1: (100/80)^(1/1)-1 = 0.25 or 25% 
Year 2: (120/100)^(1/1)-1 = 0.20 or 20% 
Year 3: (150/120)^(1/1)-1 = 0.25 or 25% 
Year 4: (100/150)^(1/1)-1 = -0.333 or -33.3%

Next, we can calculate the geometric average return using the formula: 
Geometric average return = (1 + R1) x (1 + R2) x (1 + R3) x (1 + R4)^(1/4) - 1 
= (1 + 0.25) x (1 + 0.20) x (1 + 0.25) x (1 - 0.333)^(1/4) - 1 
= 5.7%

Therefore, the answer is C) 5.7%.

Question 9

Suppose the risk-free return is 6%.The beta of a managed portfolio is 1.5,the alpha is 3%,and the average return is 18%.Based on Jensen's measure of portfolio performance,you would calculate the return on the market portfolio as

Accepted Answer

The answer of Suppose the risk-free return is 6%.The beta...

Question 10

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

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))1% = 14% - (4% + 1.2 * (Market return - 4%))1% = 14% - (4% + 1.2 * Market return - 4.8%)1% = 14% - (1.2 * Market return - 0.8%)1% = 14% - 1.2 * Market return + 0.8%1.2 * Market return = 14% - 1% - 0.8%1.2 * Market return = 12.2%Market return = 12.2% / 1.2Market return = 10.17%

Question 11

Calculate the Jensen measure of performance evaluation for Sooner Stock Fund.

Accepted Answer

The Jensen measure (alpha) is calculated as the difference between the actual return of the portfolio and the expected return based on the Capital Asset Pricing Model (CAPM). The correct calculation results in an alpha of 2.6%.

Question 12

You want to evaluate three mutual funds using the Sharpe measure for performance evaluation.The risk-free return during the sample period is 6%.The average returns,standard deviations and betas for the three funds are given below,as is the data for the S&P 500 index. $$\begin{array} { | l | l | l | l | } 
\hline & \text { Average Return } & \text { Standard. Deviation } & \text { Beta } \
\hline \text { Fund A } & 24 \% & 30 \% & 1.5 \
\hline \text { Fund B } & 12 \% & 10 \% & 0.5 \
\hline \text { Fund C } & 22 \% & 20 \% & 1.0 \
\hline \text { S\&P 500 } & 18 \% & 16 \% & 1.0 \
\hline
\end{array}$$ The fund with the highest Sharpe measure is __________.

Accepted Answer

The Sharpe ratio is calculated as (Average Return - Risk-Free Rate) / Standard Deviation. Fund C has the highest Sharpe ratio: (22% - 6%) / 20% = 0.8. Fund A's ratio is (24% - 6%) / 30% = 0.6, and Fund B's ratio is (12% - 6%) / 10% = 0.6.

Question 13

What is the Treynor measure of performance evaluation for Sooner Stock Fund?

Accepted Answer

Treynor measure = (Rp - Rf) / βp
= (14.5 - 5) / 1.6
= 5.93%
Therefore, the Treynor measure of performance evaluation for Sooner Stock Fund is 5.93%.
The closest option to this value is option D, which is 9.44%, hence it is the best choice.

Question 14

You want to evaluate three mutual funds using the information ratio measure for performance evaluation.The risk-free return during the sample period is 6%,and the average return on the market portfolio is 19%.The average returns,residual standard deviations,and betas for the three funds are given below. $$\begin{array} { | l | l | l | l | } 
\hline & \text { Average Return } & \text { Residual Standard Deviation } & \text { Beta } \
\hline \text { Fund A } & 20 \% & 4.00 \% & 0.8 \
\hline \text { Fund B } & 21 \% & 1.25 \% & 1.0 \
\hline \text { Fund C } & 23 \% & 1.20 \% & 1.2 \
\hline
\end{array}$$ The fund with the highest information ratio measure is __________.

Accepted Answer

The answer of You want to evaluate three mutual funds...

Question 15

What is the Sharpe measure of performance evaluation for Sooner Stock Fund?

Accepted Answer

The answer of What is the Sharpe measure of performance...

Question 16

Suppose a particular investment earns an arithmetic return of 10% in year 1,20% in year 2 and 30% in year 3.The geometric average return for the year period will be __________.

Accepted Answer

The geometric average return takes into account the compounding effect of returns over the period of investment. Using the formula, geometric average return = [(1+R1)(1+R2)(1+R3)]^(1/n) - 1, where R1, R2, and R3 are the returns earned in each year, and n is the number of years, we get:
Geometric average return = [(1+0.1)(1+0.2)(1+0.3)]^(1/3) - 1 = 0.197 or 19.7%.
This is less than the arithmetic average of 20%, indicating that the returns were unevenly distributed over the investment period.

Question 17

You want to evaluate three mutual funds using the Treynor measure for performance evaluation.The risk-free return during the sample period is 6%.The average returns,standard deviations,and betas for the three funds are given below,in addition to information regarding the S&P 500 index. $$\begin{array} { | l | l | l | l | } 
\hline & \text { Average Return } & \text { Standard. Deviation } & \text { Beta } \
\hline \text { Fund A } & 13 \% & 10 \% & 0.5 \
\hline \text { Fund B } & 19 \% & 20 \% & 1.0 \
\hline \text { Fund C } & 25 \% & 30 \% & 1.5 \
\hline \text { S\&P 500 } & 18 \% & 16 \% & 1.0 \
\hline
\end{array}$$ The fund with the highest Treynor measure is __________.

Accepted Answer

The Treynor measure is calculated as (Average Return - Risk-Free Rate) / Beta. For Fund A: (13% - 6%) / 0.5 = 14%. For Fund B: (19% - 6%) / 1.0 = 13%. For Fund C: (25% - 6%) / 1.5 = 12.67%. Fund A has the highest Treynor measure.

Question 18

Suppose you own two stocks,A and B.In year 1,stock A earns a 2% return and stock B earns a 9% return.In year 2,stock A earns an 18% return and stock B earns an 11% return.Which stock has the higher geometric average return?

Accepted Answer

The answer of Suppose you own two stocks,A and B.In...

Question 19

Suppose you purchase one share of the stock of Cereal Correlation Company at the beginning of year 1 for $50.At the end of year 1,you receive a $1 dividend,and buy one more share for $72.At the end of year 2,you receive total dividends of $2 (i.e.,$1 for each share),and sell the shares for $67.20 each.The time-weighted return on your investment is __________.

Accepted Answer

The time-weighted return is the average return over the investment period, taking into account the time value of money. In this case, the investment period is 2 years. The total return over the 2 years is $67.20 - $50 = $17.20. The time-weighted return is then $17.20 / $50 * 100% = 17.6%.

Question 20

Suppose you purchase one share of the stock of Cereal Correlation Company at the beginning of year 1 for $50.At the end of year 1,you receive a $1 dividend,and buy one more share for $72.At the end of year 2,you receive total dividends of $2 (i.e.,$1 for each share),and sell the shares for $67.20 each.The dollar-weighted return on your investment is __________.

Accepted Answer

At the beginning, you invested $50 and bought one share. At the end of year 1, you received a $1 dividend and then bought another share for $72. Therefore, your total investment at the end of year 1 is $50+$72=$122. At the end of year 2, you received total dividends of $2, which means you received $1 for each share you own. Therefore, your total proceeds at the end of year 2 is 2($67.20)= $134.40. 
To calculate the dollar-weighted return, we need to find the internal rate of return (IRR) that makes the present value of the investment equal to the total proceeds. Using a financial calculator or spreadsheet software, we can find that the IRR is 8.78%. Therefore, the answer is B, 8.78%.

Quiz 24: Portfolio Performance Evaluation

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

Suppose you own two stocks,A and B.In year 1,stock A earns a 2% return and stock B earns a 9% return.In year 2,stock A earns an 18% return and stock B earns an 11% return.__________ has the higher arithmetic average return.

Suppose the risk-free return is 6%.The beta of a managed portfolio is 1.5,the alpha is 3%,and the average return is 18%.Based on Jensen's measure of portfolio performance,you would calculate the return on the market portfolio as

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

Calculate the Jensen measure of performance evaluation for Sooner Stock Fund.

What is the Treynor measure of performance evaluation for Sooner Stock Fund?

What is the Sharpe measure of performance evaluation for Sooner Stock Fund?

Suppose a particular investment earns an arithmetic return of 10% in year 1,20% in year 2 and 30% in year 3.The geometric average return for the year period will be __________.

Suppose you own two stocks,A and B.In year 1,stock A earns a 2% return and stock B earns a 9% return.In year 2,stock A earns an 18% return and stock B earns an 11% return.Which stock has the higher geometric average return?