Deck 25: Evaluation of Portfolio Performance

Question 1

Sharpe's performance assumes that all portfolios are completely diversified.

Answer 1

True

Question 2

Funds with low levels of diversification tend to "beat the market."

Answer 2

False

Question 3

Duration is considered a good measure of risk for a bond portfolio because it indicates the relative volatility of the bond or portfolio due to interest rate changes and also the rating of the bonds.

Answer 3

False

Question 4

An appropriate composite risk measure that indicates the relative price volatility for a bond compared to interest rate changes is the bond's yield to maturity.

Question 5

The portfolio performance measure that can be most affected by a benchmark error is the Sharpe measure.

Question 6

A peer group comparison collects the returns produced by a representative universe of investors over a specific period of time and displays them in a simple boxplot format.

Question 7

Attribution analysis separates a portfolio manager's performance into an allocation effect and selection effect.

Question 8

Investors want their portfolio managers to completely diversify their portfolio,that is,eliminate all systematic risk.

Question 9

The Sharpe and Treynor measures complement each other and thus both should be used to measure portfolio performance.

Question 10

The Sharpe measure examines the risk premium per unit of systematic risk.

Question 11

The Jensen measure requires that each period's rates of return and risk-free rate be measured,rather than using the long-term averages as in the Treynor and Sharpe measures.

Question 12

A negative Treynor measure (negative T)for a portfolio always indicates that the portfolio would plot below the SML.

Question 13

A test of bond performance over time indicated that bond portfolio managers are more consistent over time than equity managers.

Question 14

Treynor's performance measure implicitly assumes a completely diversified portfolio.

Question 15

The Sharpe and Treynor measures always give different rankings.

Question 16

Overall performance is the total return above the risk free rate.

Question 17

The policy effect is a difference in bond portfolio performance from that of a benchmark index due to a difference in duration.

Question 18

The typical proxy for the market portfolio is the S&P 500 Index because it is diversified and price weighted.

Question 19

In evaluating bond performance,the Lehman Brothers Index is an appropriate risk measure.

Question 20

The ranking differences between the Sharpe,Treynor and Jensen performance measures occur because of the differences in diversification.

Question 21

Under the performance attribution analysis method,the ____ measures the manager's ability to form specific market segment portfolios that generate superior returns relative to the way in which the comparable market segment is defined in the benchmark portfolio weighted by the manager's actual market segment investment proportions.

A) Selection effect
B) Allocation effect
C) Distribution effect
D) Diversification effect
E) Attribution effect

Question 22

The most common manner of evaluating portfolio managers is a peer group comparison.

Question 23

The Sharpe measure of portfolio performance divides the portfolio's risk premium by the portfolio's beta.

Question 24

Treynor developed the first composite measure of portfolio performance by introducing the capital market line,which defines the relationship between the return of a portfolio over time and the return for the market portfolio.

Question 25

Treynor showed that rational,risk averse investors always prefer portfolio possibility lines that have

A) Zero slopes.
B) Slightly negative slopes.
C) Highly negative slopes.
D) Slightly positive slopes.
E) Highly positive slopes.

Question 26

The information ratio permits only relative assessments of performance for different portfolios in a style class.

Question 27

Portfolio managers who anticipate an increase in interest rates should

A) Act to keep the duration constant.
B) Decrease the portfolio duration.
C) Increase the portfolio duration.
D) Assume higher risk in the market.
E) Invest in junk bonds.

Question 28

When applying the Jensen's alpha measure the alpha level and significance can vary greatly depending on the specification of the return-generating model.

Question 29

The measure of performance which divides the portfolio's risk premium by the portfolio's beta is the

A) Sharpe measure.
B) Jensen measure.
C) Fama measure.
D) Alternative components model (MCV).
E) Treynor measure.

Question 30

Under the performance attribution analysis method,the ____ measures the manager's decision to over- or underweight a particular market segment in terms of that segment's return performance relative to the overall return to the benchmark.

A) Selection effect
B) Allocation effect
C) Distribution effect
D) Diversification effect
E) Attribution effect

Question 31

Which measure of portfolio performance allows analysts to determine the statistical significance of abnormal returns?

A) Sharpe measure
B) Jensen measure
C) Fama measure
D) Alternative components model (MCV)
E) Treynor measure

Question 32

Selectivity measures how well a portfolio performed relative to a

A) Market portfolio (S&P 400).
B) Portfolio of the same securities in the previous period.
C) Naively selected portfolio of equal risk.
D) Naively selected portfolio of equal return.
E) World market portfolio.

Question 33

Two desirable attributes of a portfolio manager's performance are the ability to derive above-average returns for a given risk class and the ability to time the market.

Question 34

If the return increases as more global investments with low correlation are added to the market portfolio,the efficient frontier moves

A) Up and right.
B) Up and left.
C) Down and right.
D) Down and left.
E) Up only.

Question 35

A portfolio performance measurement technique that decomposes the return of a manager's holdings to a predetermined benchmark's returns and separates the difference into an allocation and selection is called

A) Immunization analysis.
B) Performance attribution analysis.
C) Tactical rankings.
D) Convexity utilization.
E) Duration matching attrition.

Question 36

The market rewards investors for bearing total risk.

Question 37

Sharpe's performance measure divides the portfolio's risk premium by the

A) Standard deviation of the rate of return.
B) Variance of the rate of return.
C) Slope of the fund's characteristic line.
D) Beta.
E) Risk free rate.

Question 38

The major requirements of a portfolio manager include the following,except

A) Follow the client's policy statement.
B) Completely diversify the portfolio to eliminate all unsystematic risk.
C) The ability to derive above-average risk adjusted returns.
D) Completely diversify the portfolio to eliminate all systematic risk.
E) None of the above (that is, all are requirements of a portfolio manager)

Question 39

Wagner and Tito suggested that a bond portfolio return differing from the return from the Lehman Brothers Index can be divided into four components.Which of the following is not included?

A) Policy effect
B) Rate anticipation effect
C) Sector/Quality effect
D) Analysis effect
E) Trading effect

Question 40

A portfolio manager should be evaluated many times and in a variety of market environments before a final judgment is reached regarding his/her strengths and weaknesses.

Question 41

A portfolio's gross selectivity is made up of

A) Manager's risk.
B) Net selectivity.
C) Diversification.
D) a and b.
E) b and c.

Question 42

Which of the following statements concerning performance measures is false?

A) The Sharpe measure examines both unsystematic and systematic risk.
B) The Treynor measure examines systematic risk.
C) The Jensen measure examines systematic risk.
D) All three measures examine both unsystematic and systematic risk.
E) None of the above (that is, all statements are true)

Question 43

Bailey,Richards,and Tierney maintain that any useful benchmark should have the following characteristics:

A) Measurable.
B) Investable.
C) Value-weighted.
D) a and b.
E) a, b and c.

Question 44

A disadvantage of the Treynor and Sharpe measures is that

A) They produce absolute performance rankings.
B) The beta and standard deviation are static.
C) They are both difficult to compute.
D) They produce relative performance rankings.
E) They give very different measurements for well-diversified portfolios.

Question 45

A manager's superior returns could have occurred due to:

A) an insightful asset allocation strategy, over weighting an asset class that earned high returns.
B) investing in undervalued sectors.
C) selecting individual securities that earned above average returns.
D) Choices a and c
E) All of the above

Question 46

In the Characteristic Selectivity (CS)performance measure,

A) Portfolio performance is measured by assessing the quality of services provided by money managers by looking at adjustments made to the content of their portfolios.
B) Portfolio performance is measured by examining both unsystematic and systematic risk.
C) Portfolio performance is measured by comparing the returns of each stock in the portfolio to the return of a benchmark portfolio. With the same aggregate investment characteristics as the security in question.
D) Portfolio performance is measured on the basis of return per unit of risk.
E) Portfolio performance is measured on the basis of historic average differential return per unit of historic variability of differential return.

Question 47

In the evaluation of bond portfolio performance,the analysis effect refers to

A) The difference in portfolio duration and index duration.
B) The extra return attributable to acquiring bonds that are temporarily mispriced relative to risk.
C) Short-run changes in the portfolio during a specific period.
D) The differential return from changing duration of the portfolio during a specific period.
E) None of the above

Question 48

Information ratio portfolio performance measures

A) Adjust portfolio risk to match benchmark risk.
B) Compare portfolio returns to expected returns under CAPM.
C) Evaluate portfolio performance on the basis of return per unit of risk.
D) Indicate historic average differential return per unit of historic variability of differential return.
E) None of the above.

Question 49

In the evaluation of bond portfolio performance,the policy effect refers to

A) The difference in portfolio duration and index duration.
B) The extra return attributable to acquiring bonds that are temporarily mispriced relative to risk.
C) Short-run changes in the portfolio during a specific period.
D) The differential return from changing duration of the portfolio during a specific period.
E) None of the above.

Question 50

Excess return portfolio performance measures

A) Adjust portfolio risk to match benchmark risk.
B) Compare portfolio returns to expected returns under CAPM.
C) Evaluate portfolio performance on the basis of return per unit of risk.
D) Indicate historic average differential return per unit of historic variability of differential return.
E) None of the above.

Question 51

Which of the following statements about returns-based analysis or effective mix analysis is true?

A) This analysis compares the historical return pattern of the portfolio in question with the historical returns of various well-specified indexes.
B) This analysis uses sophisticated quadratic programming techniques to indicate what styles or style combinations were most similar to the portfolio's actual historical returns.
C) This analysis is based on the belief that the portfolio's current make-up will be a good predictor for the next period's returns.
D) Choices a and b
E) All of the above statements describe returns-based analysis or effective mix analysis

Question 52

The cost of active management is the coefficient sER and it is sometimes referred to as

A) Market timing.
B) Reward for risk.
C) Excess reward.
D) Excess risk.
E) Tracking error.

Question 53

In the Grinblatt-Titman (GT)performance measure,

A) Portfolio performance is measured by assessing the quality of services provided by money managers by looking at adjustments made to the content of their portfolios.
B) Portfolio performance is measured by examining both unsystematic and systematic risk.
C) Portfolio performance is measured by comparing the returns of each stock in the portfolio to the return of a benchmark portfolio. With the same aggregate investment characteristics as the security in question.
D) Portfolio performance is measured on the basis of return per unit of risk.
E) Portfolio performance is measured on the basis of historic average differential return per unit of historic variability of differential return.

Question 54

In the evaluation of bond portfolio performance,the interest rate anticipation effect refers to

A) The difference in portfolio duration and index duration.
B) The extra return attributable to acquiring bonds that are temporarily mispriced relative to risk.
C) Short-run changes in the portfolio during a specific period.
D) The differential return from changing duration of the portfolio during a specific period.
E) None of the above

Question 55

For a poorly diversified portfolio the appropriate measure of portfolio performance would be

A) The Treynor measure because it evaluates portfolio performance on the basis of return and diversification.
B) The Sharpe measure because it evaluates portfolio performance on the basis of return and diversification.
C) The Treynor measure because it uses standard deviation as the risk measure.
D) The Sharpe measure because it uses beta as the risk measure.
E) None of the above.

Question 56

A more recent adjustment to the Sharpe measurement for portfolio evaluation is

A) To divide the portfolio risk premium by total risk rather than the portfolio's beta.
B) To divide the portfolio risk premium by standard deviation rather than the portfolio's beta.
C) To divide the portfolio risk premium by the excess portfolio return rather than total risk.
D) To divide the excess portfolio return by the portfolio's standard deviation.
E) To divide the excess portfolio return by the portfolio's beta.

Question 57

Components of overall portfolio performance include

A) Selectivity.
B) Manager's risk.
C) Security risk.
D) a and b.
E) a, b and c.

Question 58

Relative return portfolio performance measures

A) Adjust portfolio risk to match benchmark risk.
B) Compare portfolio returns to expected returns under CAPM.
C) Evaluate portfolio performance on the basis of return per unit of risk.
D) Indicate historic average differential return per unit of historic variability of differential return.
E) None of the above.

Question 59

The Sortino measure differs from the Sharpe ratio in that

A) It measures the portfolio's average return in excess of a user-selected minimum acceptable return threshold.
B) It measures the downside risk in a portfolio.
C) Higher values of the Sortino measure are not desirable, while higher values in the Sharpe ratio are desirable.
D) Both a and b
E) All of the above.

Question 60

Which portfolio measurement uses the mean excess return in the numerator divided by the amount of residual risk that the investor incurred in pursuit of those excess returns?

A) Jensen measure.
B) Fama measure.
C) Sharpe measure.
D) Treynor ratio.
E) Information ratio.

Question 61

Exhibit 25.2
Use the Information Below for the Following Problem(S)
The portfolios identified below are being considered for investment. Assume that during the period under consideration Rf = .04.
$$\begin{array} { c c c c } \text { Partilio } & \text { Return } & \text { Beta } & \text { ? } \\\hline W & 0.18 & 1.8 & 0.06 \\\mathbf { X } & 0.21 & 0.9 & 0.10 \\\mathbf { Y } & 0.13 & 0.7 & 0.03 \\Z & 0.16 & 1.5 & 0.07\end{array}$$

-Refer to Exhibit 25.2.Using the Sharpe Measure,which portfolio performed best?

A) W
B) X
C) Y
D) Z
E) Two portfolios are tied

Question 62

Exhibit 25.1
Use the Information Below for the Following Problem(S)
The portfolios identified below are being considered for investment. During the period under consideration Rf = .03.
$$\begin{array} { c c c c } \text { Partfolid } & \text { Return } & \text { Beta } & \text { ? } \\\hline \text { A } & 0.16 & 1 . 0 & 0.15 \\B & 0.22 & 1.5 & 0.10 \\\text { C } & 0.11 & 0.6 & 0.08 \\D & 0.18 & 1.1 & 0.12\end{array}$$

-Refer to Exhibit 25.1.Using the Sharpe Measure,which portfolio performed best?

A) A
B) B
C) C
D) D
E) Two portfolios are tied

Question 63

Exhibit 25.6
Use the Information Below for the Following Problem(S)
Given the following information evaluate the performance of Cloud Incorporated (CI).

Refer to Exhibit 25.6.Calculate CI's selectivity.

A) 0.1225
B) 0.1000
C) 0.0525
D) 0.0475
E) 0.0325

Question 64

Exhibit 25.2
Use the Information Below for the Following Problem(S)
The portfolios identified below are being considered for investment. Assume that during the period under consideration Rf = .04.
$$\begin{array} { c c c c } \text { Partilio } & \text { Return } & \text { Beta } & \text { ? } \\\hline W & 0.18 & 1.8 & 0.06 \\\mathbf { X } & 0.21 & 0.9 & 0.10 \\\mathbf { Y } & 0.13 & 0.7 & 0.03 \\Z & 0.16 & 1.5 & 0.07\end{array}$$

-Refer to Exhibit 25.2.According to the Treynor Measure,which portfolio performed best?

A) W
B) X
C) Y
D) Z
E) Two portfolios are tied

Question 65

Which of the following performance measures is the most rigorous risk-adjustment process separating systematic and unsystematic risk?

A) Treynor ratio
B) Sharpe ratio
C) Jensen's Alpha
D) Information ratio
E) None of the above

Question 66

Exhibit 25.5
Use the Information Below for the Following Problem(S)
The data presented below has been collected at this point in time.

Refer to Exhibit 25.5.Compute the Jensen Measure for the YYY fund.

A) 6.98
B) 2.35
C) 2.53
D) 3.86
E) 1.72

Question 67

Exhibit 25.3
Use the Information Below for the Following Problem(S)
Consider the data presented below on three mutual funds and the market.

Refer to Exhibit 25.3.Compute the Treynor Measure for the CCC fund.

A) 14.7
B) 15.3
C) 19.1
D) 17.0
E) 12.7

Question 68

Exhibit 25.4
Use the Information Below for the Following Problem(S)
The data presented below has been collected at this point in time.

Refer to Exhibit 25.4.Compute the Treynor Measure for the CCC fund.

A) 5.43
B) 2.74
C) 2.19
D) 2.00
E) 1.65

Question 69

Exhibit 25.5
Use the Information Below for the Following Problem(S)
The data presented below has been collected at this point in time.

Refer to Exhibit 25.5.Compute the Sharpe Measure for the XXX fund.

A) 6.98
B) 2.35
C) 2.53
D) 3.86
E) 1.72

Question 70

Exhibit 25.1
Use the Information Below for the Following Problem(S)
The portfolios identified below are being considered for investment. During the period under consideration Rf = .03.
$$\begin{array} { c c c c } \text { Partfolid } & \text { Return } & \text { Beta } & \text { ? } \\\hline \text { A } & 0.16 & 1 . 0 & 0.15 \\B & 0.22 & 1.5 & 0.10 \\\text { C } & 0.11 & 0.6 & 0.08 \\D & 0.18 & 1.1 & 0.12\end{array}$$

-Refer to Exhibit 25.1.According to the Treynor Measure,which portfolio performed best?

A) A
B) B
C) C
D) D
E) Two portfolios are tied

Question 71

Exhibit 25.6
Use the Information Below for the Following Problem(S)
Given the following information evaluate the performance of Cloud Incorporated (CI).

Refer to Exhibit 25.6.Calculate CI's overall performance.

A) 0.1225
B) 0.1000
C) 0.0525
D) 0.0475
E) 0.0325

Question 72

Exhibit 25.6
Use the Information Below for the Following Problem(S)
Given the following information evaluate the performance of Cloud Incorporated (CI).

Refer to Exhibit 25.6.Calculate CI's risk.

A) 0.1225
B) 0.1000
C) 0.0525
D) 0.0475
E) 0.0325

Question 73

Exhibit 25.5
Use the Information Below for the Following Problem(S)
The data presented below has been collected at this point in time.

Refer to Exhibit 25.5.Compute the Treynor Measure for the ZZZ fund.

A) 6.98
B) 2.35
C) 2.53
D) 3.86
E) 1.72

Question 74

Exhibit 25.3
Use the Information Below for the Following Problem(S)
Consider the data presented below on three mutual funds and the market.

Refer to Exhibit 25.3.Compute the Sharpe Measure for the AAA fund.

A) 4.49
B) 2.74
C) 1.57
D) 1.70
E) 1.27

Question 75

Exhibit 25.3
Use the Information Below for the Following Problem(S)
Consider the data presented below on three mutual funds and the market.

Refer to Exhibit 25.3.Compute the Jensen Measure for the BBB fund.

A) 4.49
B) 2.74
C) 4.25
D) 5.55
E) 8.99

Question 76

Exhibit 25.5
Use the Information Below for the Following Problem(S)
The data presented below has been collected at this point in time.

What is the Sharpe measure for the S&P 500 over the last ten years if the standard deviation was 8% and the return was 14%?

A) 1.55
B) 1.69
C) 1.75
D) 1.99
E) 2.09

Question 77

Exhibit 25.4
Use the Information Below for the Following Problem(S)
The data presented below has been collected at this point in time.

Refer to Exhibit 25.4.Compute the Sharpe Measure for the AAA fund.

A) 2.01
B) 2.74
C) 2.91
D) 5.43
E) 1.72

Question 78

Suppose the expected return for the market portfolio and risk-free rate are 13% and 3% respectively.Stocks A,B,and C have Treynor measures of 0.24,0.16,and 0.11,respectively.Based on this information an investor should

A) Buy stocks A, B, and C
B) Buy stocks A and B and sell stock C
C) Buy stock A and sell stocks B and C
D) Sell stocks A, B, and C
E) Hold stocks A, B, and C

Question 79

Exhibit 25.4
Use the Information Below for the Following Problem(S)
The data presented below has been collected at this point in time.

Refer to Exhibit 25.4.Compute the Jensen Measure for the BBB fund.

A) 2.10
B) 2.74
C) 5.43
D) 2.00
E) 1.65

Question 80

Portfolio managers are often evaluated using a boxplot of returns for a universe of investors over a specific period of time which is known as a(n)

A) Return adjusted comparison
B) Efficient frontier comparison
C) Time plot comparison
D) Peer group comparison
E) None of the above