Deck 22: Evaluation of Investment Performance

Question 1

Assume Portfolio A and Portfolio B are well-diversified;however,Portfolio A has a higher standard deviation than Portfolio B.Based on this information,the Sharpe ratio will give Portfolio A:

A)the higher rank,and the Treynor ratio will give Portfolio B the higher rank.
B)the lower rank,and the Treynor ratio will give Portfolio B the lower rank.
C)the same rank as the rank assigned by the Treynor ratio.
D)a rank that varies directly based on the overall market risk.

Answer 1

C

Question 2

If we are to assess performance carefully,we must do so on what kind of basis?

A)Quarterly
B)Annual
C)Attribution-weighted
D)Risk-adjusted

Answer 2

D

Question 3

Superior portfolio performance can result from:

A)the ability to select undervalued securities,only.
B)the ability to time market turns,only.
C)superior selectivity or timing performance.
D)neither superior selectivity nor timing because the market is too efficient.

Answer 3

C

Question 4

Relative to the Sharpe ratio,the Sortino ratio will make a portfolio's performance look more favorable if the portfolio has experienced:

A)fewer extreme negative returns relative to extreme positive returns.
B)fewer extreme positive returns relative to extreme negative returns.
C)an equal number of extreme positive and extreme negative returns.
D)virtually no extreme negative or extreme positive returns.

Question 5

The information in the following table is to be used to answer questions .
$\begin{array}{|l|c|c|c|c|}\hline \text { Fund } & \begin{array}{c}\text { Standard } \\\text { Deviation }\end{array} & \text { Beta } & \begin{array}{c}\text { Jensen's } \\\text { Alpha }\end{array} & \mathrm{R}^{2} \\\hline \text { Fund 1 } & 1.97 & 1.0 & 1.3 & 0.95 \\\hline \text { Fund 2 } & 2.97 & 0.8 & 0.6^{*} & 0.80 \\\hline \text { Fund 3 } & 3.82 & 1.2 & -3.5^{*} & 0.90 \\\hline \text { Fund 4 } & 3.50 & 1.4 & 4.2 & 0.65 \\\hline\end{array}$
* Significant at the 5 percent level

-Which fund is least well-diversified?

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

Question 6

What is the major question when evaluating the performance of an individual's portfolio?

A)Does the portfolio align with the investor's characteristics?
B)Does the expected return of the portfolio meet the needs of the investor?
C)Is the return on the portfolio adequate to compensate for its risk?
D)Is the portfolio's risk in line with the personal characteristics of the investor?

Question 7

Which of the following represents the alternative portfolio that reflects the objectives of the portfolio under management?

A)Market average index
B)Efficient portfolio
C)Benchmark portfolio
D)Performance standard

Question 8

Which of the following indices is most appropriate as a benchmark portfolio for a large-cap mutual fund?

A)Wilshire 5000
B)S&P 500
C)Dow Jones Industrial Average
D)Russell 2000

Question 9

The information ratio is calculated as the ratio of:

A)mean active return to tracking risk.
B)alpha to beta.
C)excess return to portfolio standard deviation.
D)portfolio excess return to tracking risk.

Question 10

The information in the following table is to be used to answer questions .
$\begin{array}{|l|c|c|c|c|}\hline \text { Fund } & \begin{array}{c}\text { Standard } \\\text { Deviation }\end{array} & \text { Beta } & \begin{array}{c}\text { Jensen's } \\\text { Alpha }\end{array} & \mathrm{R}^{2} \\\hline \text { Fund 1 } & 1.97 & 1.0 & 1.3 & 0.95 \\\hline \text { Fund 2 } & 2.97 & 0.8 & 0.6^{*} & 0.80 \\\hline \text { Fund 3 } & 3.82 & 1.2 & -3.5^{*} & 0.90 \\\hline \text { Fund 4 } & 3.50 & 1.4 & 4.2 & 0.65 \\\hline\end{array}$
* Significant at the 5 percent level

-Which fund has the most total risk?

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

Question 11

Which of the following statements about the Sharpe ratio and Treynor ratio is most accurate? The Sharpe ratio is based on:

A)total risk,whereas the Treynor ratio is based on systematic risk.
B)systematic risk,whereas the Treynor ratio is based on total risk.
C)unsystematic risk,whereas the Treynor ratio is based on systematic risk.
D)total risk,whereas the Treynor ratio is based on unsystematic risk.

Question 12

The Global Investment Performance Standards (GIPS®)were created by:

A)the CFA Institute.
B)the Securities and Exchange Commission (SEC).
C)Morningstar.
D)the Federal Reserve.

Question 13

According to Jensen's differential return measure,what is alpha?

A)The intercept of the SML line
B)The intercept of the CML line
C)A measure of the superior or inferior performance on a portfolio
D)The actual excess return on a portfolio during one period

Question 14

Which of the following measures indicates the percentage of the variation in a portfolio's returns that is explained by variation in the market's returns?

A)Standard deviation
B)Coefficient of determination
C)Beta
D)Alpha

Question 15

Which of the following measures uses the standard deviation and evaluates portfolio performance on the basis of both return and diversification.

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

Question 16

The reward-to-variability ratio (Sharpe ratio)measures:

A)return above the risk-free rate.
B)excess return per unit of total risk.
C)total risk per unit of excess return.
D)return above the risk-free rate relative to beta.

Question 17

A portfolio with a beta of 0.8 earned a return of 13 percent when the risk-free rate was 6 percent and the market returned 9 percent.The portfolio's Treynor measure is closest to:

A)1.8.
B)3.8.
C)5.0.
D)8.8.

Question 18

The information in the following table is to be used to answer questions .
$\begin{array}{|l|c|c|c|c|}\hline \text { Fund } & \begin{array}{c}\text { Standard } \\\text { Deviation }\end{array} & \text { Beta } & \begin{array}{c}\text { Jensen's } \\\text { Alpha }\end{array} & \mathrm{R}^{2} \\\hline \text { Fund 1 } & 1.97 & 1.0 & 1.3 & 0.95 \\\hline \text { Fund 2 } & 2.97 & 0.8 & 0.6^{*} & 0.80 \\\hline \text { Fund 3 } & 3.82 & 1.2 & -3.5^{*} & 0.90 \\\hline \text { Fund 4 } & 3.50 & 1.4 & 4.2 & 0.65 \\\hline\end{array}$
* Significant at the 5 percent level

-Based on Jensen's performance measure,which fund significantly outperformed?

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

Question 19

The information in the following table is to be used to answer questions .
$\begin{array}{|l|c|c|c|c|}\hline \text { Fund } & \begin{array}{c}\text { Standard } \\\text { Deviation }\end{array} & \text { Beta } & \begin{array}{c}\text { Jensen's } \\\text { Alpha }\end{array} & \mathrm{R}^{2} \\\hline \text { Fund 1 } & 1.97 & 1.0 & 1.3 & 0.95 \\\hline \text { Fund 2 } & 2.97 & 0.8 & 0.6^{*} & 0.80 \\\hline \text { Fund 3 } & 3.82 & 1.2 & -3.5^{*} & 0.90 \\\hline \text { Fund 4 } & 3.50 & 1.4 & 4.2 & 0.65 \\\hline\end{array}$
* Significant at the 5 percent level

-Which fund's returns are best explained by the market's returns?

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

Question 20

The information in the following table is to be used to answer questions .
$\begin{array}{|l|c|c|c|c|}\hline \text { Fund } & \begin{array}{c}\text { Standard } \\\text { Deviation }\end{array} & \text { Beta } & \begin{array}{c}\text { Jensen's } \\\text { Alpha }\end{array} & \mathrm{R}^{2} \\\hline \text { Fund 1 } & 1.97 & 1.0 & 1.3 & 0.95 \\\hline \text { Fund 2 } & 2.97 & 0.8 & 0.6^{*} & 0.80 \\\hline \text { Fund 3 } & 3.82 & 1.2 & -3.5^{*} & 0.90 \\\hline \text { Fund 4 } & 3.50 & 1.4 & 4.2 & 0.65 \\\hline\end{array}$
* Significant at the 5 percent level

-Which of the funds has the most market risk?

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

Question 21

Which of the following statements about return calculation is most accurate?

A)Time-weighted returns are always higher than money-weighted returns.
B)Money-weighted returns are always higher than time-weighted returns.
C)The GIPS require that time-weighted returns are reported for most asset classes.
D)The time-weighted return is equivalent to the IRR.

Question 22

One approach to style analysis which uses the features of the stocks in the portfolio is known as:

A)returns-based style analysis.
B)asset allocation style analysis.
C)holdings-based style analysis.
D)mix-based style analysis.

Question 23

The use of the Treynor measure implies that total risk is the proper measure of risk in performance evaluation.

Question 24

Based on Jensen's measure,superior portfolio performance is exhibited by a:

A)statistically significant positive alpha.
B)statistically significant negative alpha.
C)zero alpha.
D)low positive alpha.

Question 25

Total risk of a portfolio is measured by the beta coefficient.

Question 26

Performance attribution separates return performance into the following two sources:

A)security analysis and portfolio management.
B)money market and capital market securities.
C)traditional assets and alternative assets.
D)asset allocation and security selection.

Question 27

To claim GIPS compliance in reporting portfolio performance,the standards require:

A)a 5-year performance record,or since inception if the fund is less than 5-years old.
B)that the majority of the firm's funds meet GIPS standards.
C)that the majority of the firm's portfolios are included in the performance record.
D)a firm build toward a minimum record of 20 years of reported performance.

Question 28

Which of the following is the largest recognized problem with style analysis?

A)Funds frequently do not maintain style consistency over time.
B)Comparing style across funds is nearly impossible.
C)It is very difficult to determine the style a fund is following.
D)There are too many alternative means to calculate a fund's style.

Question 29

When evaluating the performance of a mutual fund holding several S&P 500 stocks,one should always use the S&P 500 as the benchmark.

Question 30

Which organization has issued minimum standards for the reporting of investment performance?

A)FINRA
B)Securities and Exchange Commission (SEC)
C)Association for Security Analysts and Portfolio Managers
D)Chartered Financial Analyst Institute

Question 31

Which measure calculates performance relative to a benchmark portfolio?

A)Sortino ratio
B)M2
C)Information ratio
D)Sharpe ratio

Question 32

Treynor's measure is a ratio of excess return to systematic risk.

Question 33

Carl invested $100,000 in a fund,which earned 8% over the next year.At the end of the year,he invested an additional $50,000 and the fund earned 18% over the next year.Carl withdrew no money from the fund.Which of the following statements about time-weighted return (TWR)and money-weighted return (MWR)is most accurate?

A)TWR is greater than MWR,and MWR is the more appropriate measure for Carl.
B)MWR is greater than TWR,and MWR is the more appropriate measure for Carl.
C)TWR is greater than MWR,and TWR is the more appropriate measure for Carl.
D)MWR is greater than TWR,and TWR is the more appropriate measure for Carl.

Question 34

Standard deviation,beta,and coefficient of determination are readily available for mutual funds from sources like Morningstar.

Question 35

The money-weighted rate of return is equivalent to the internal rate of return.

Question 36

The higher the Sharpe ratio,the better the risk-adjusted portfolio performance.

Question 37

Sharpe's measure is a ratio of excess return to total risk.

Question 38

The time-weighted rate of return is affected by any cash flows to the portfolio.

Question 39

Which of the following is true regarding M2?It produces a measure of portfolio performance that:

A)is adjusted for systematic risk.
B)can be compared directly to the risk-free rate.
C)can be compared directly with the market return.
D)indicates what would be possible if the portfolio was fully leveraged.

Question 40

Which of the following statements about portfolio return calculation is most accurate? Time-weighted returns are best for measuring the returns of a:

A)fund manager,whereas money-weighted returns are best for a portfolio owner.
B)portfolio owner,whereas money-weighted returns are best for a fund manager.
C)fund manager,whereas money-weighted returns are no longer used in practice.
D)portfolio owner,whereas money-weighted returns are generally used in practice.

Question 41

Discuss how constraints on portfolio managers affect the portfolio results.

Question 42

Investors who have all their assets in one portfolio of securities should rely on the Sharpe measure rather than the Treynor measure.

Question 43

Performance attribution seeks to determine the detailed investment style adopted by a money manager.

Question 44

Jensen's measure of performance is based on the CAPM.

Question 45

Time-weighted,as opposed to money-weighted,return captures the rate of return actually earned by the fund manager.

Question 46

Jensen's alpha is a risk-adjusted performance measure.

Question 47

The purpose of performance attribution is to assess the risk of a portfolio.

Question 48

GIPS requires compliant history for at least 10 years,or since inception,if less than 10 years.

Question 49

Explain the characteristic line in excess return form for the Jensen alpha measure.

Question 50

What are some of the problems associated with using risk-adjusted portfolio performance measures?

Question 51

How is regression analysis used to measure portfolio diversification?

Question 52

What is the major difference between the Sharpe and Treynor measures?

Question 53

What are the appropriate uses of the Sharpe and the Treynor performance measures?

Question 54

A retired couple's assets consist of a $100,000 house,a $400,000 securities portfolio,a $15,000 car,and personal effects.Would they be more concerned with the Sharpe measure or the Treynor measure for the portfolio?

Question 55

GIPS requirements include: uniformity in certain performance calculations and disclosures;inclusion of all actual fee-paying discretionary portfolios in composites with similar objectives;compliant history for at least 5 years,or since inception if less than 5 years.

Question 56

What is performance attribution?

Question 57

GIPS was created to obtain global acceptance of a standard for fair presentation.

Question 58

Modigliani-squared is a return adjusted for volatility that allows returns between portfolios to be compared.

Question 59

Sharpe's ratio measures the slope of the line between RF and the portfolio being evaluated.If the line is plotted between RF and a market index,where would superior portfolios lie?Inferior portfolios?

Question 60

The coefficient of determination,also known as R-squared,is used to denote the degree of diversification.