Deck 22: Measuring Risks and Returns of Portfolio Managers

Question 1

Most funds show a positive performance compared to a market average.

Answer 1

False

Question 2

A portfolio manager with a beta less than one should be expected to provide higher returns than the market.

Answer 2

False

Question 3

The effectiveness of portfolio diversification can be measured by the coefficient of determination, which is the correlation between excess returns on the market and those on the fund.

Answer 3

True

Question 4

Michael Jensen uses the security market line to evaluate excess returns on investments.

Question 5

Over 20-year rolling periods, the worst performance by small company stocks was positive, according to Ibbotson and Associates.

Question 6

When the U.S. T-bill rate is 5.75%, the excess returns on a portfolio earning 14% would be 8.25%.

Question 7

In general, the best portfolio managers are those who earn the highest returns.

Question 8

Most law suits against fund managers are for poor performance in terms of return.

Question 9

Alpha must always be a positive number.

Question 10

The wise money manager will generally adhere strictly to stated objectives.

Question 11

R² is a good measure of efficient diversification.

Question 12

Sharpe uses beta as a measure of risk.

Question 13

Treynor uses beta as a measure of risk.

Question 14

Studies by Ippolito and Goodwin indicate that mutual fund managers are superior performers.

Question 15

Major studies have shown that fund managers in general are unable to efficiently diversify the portfolios primarily due to a small number of securities.

Question 16

A fund manager has almost total control over the beta of his portfolio.

Question 17

Under the Sharpe, Treynor, and Jensen approaches, the return measurement must be compared to risk in some form.

Question 18

Buying a mutual fund is a good way to diversify.

Question 19

The relationship between excess returns and the portfolio beta is represented by the market line.

Question 20

The Jensen study indicates that mutual fund managers tend to have very superior performances.

Question 21

According to a study by John McDonald published in the Journal of Financial and Quantitative Analysis, portfolio managers generally:

A)follow the objectives initially set for the portfolio.
B)set objectives for the portfolio but don't follow them.
C)have difficulty following the portfolio objectives.
D)None of the above

Question 22

Which of the following is the final measure used to evaluate a portfolio manager's performance using the Jensen approach?

A)Alpha ONLY
B)Alpha and the standard deviation
C)Standard deviation
D)None of the above

Question 23

Under the _____ approach, excess returns on a portfolio are compared to the total risk of the portfolio.

A)Sharpe
B)Treynor
C)Jensen
D)More than one of the above

Question 24

Professional money managers may be evaluated based on:

A)their adherence to stated objectives.
B)their ability to efficiently diversify the portfolio.
C)their return, relative to degree of risk.
D)All of the above

Question 25

Asset managers typically lose their jobs because of poorly allocated portfolios under a given market condition.

Question 26

Adherence to objectives as measured by risk exposure is important in evaluating a fund manager because risk is one of the variables a money manager can directly control.

Question 27

One primary reason for the long-term average performance of mutual funds in general is:

A)inflation.
B)high transaction costs.
C)volatile stock market conditions.
D)None of the above

Question 28

To achieve effective diversification, a fund must have 80 to 100 different securities.

Question 29

Jensen uses alpha as a measure of performance.

Question 30

The least risk exposure would be appropriate for a mutual fund which:

A)generates income for investors living on a fixed income.
B)is oriented toward capital gains for wealthy investors.
C)is designed for young, upwardly mobile professionals.
D)None of the above

Question 31

The Sharpe measure on a portfolio which earns 12%, with a standard deviation of 30%, and beta of 1.27, is:

A).40.
B).094.
C).508.
D)There is not enough information

Question 32

If the portfolio return is 10%, and the U.S. T-bill rate is 5.75%, what is the Treynor measure of excess returns?

A).4250
B).0425
C).7391
D)There is not enough information to tell

Question 33

Under the Jensen approach, if the market rate of excess returns is 5.75%, a portfolio with beta of .9 should provide excess returns of:

A)5.175%.
B)4.5%.
C)5%.
D)There is not enough information to tell

Question 34

According to numerous studies conducted by various professors, portfolio managers generally:

A)outperform the market on a risk-adjusted basis.
B)perform the same as the market.
C)under-perform the market.
D)greatly outperform the market on a risk-adjusted basis.

Question 35

The only difference between the Sharpe and Treynor approaches is that the Treynor approach evaluates excess returns based on:

A)total risk.
B)unsystematic risk.
C)systematic risk.
D)None of the above

Question 36

The term excess returns is commonly defined as:

A)total portfolio returns, minus the market rate.
B)total portfolio returns, minus the risk-free rate.
C)(portfolio returns minus the risk-free rate) divided by beta.
D)None of the above

Question 37

Using the Jensen approach, the adequacy of a portfolio manager's performance cannot be judged against the market line.

Question 38

Most funds' performance in terms of R² is poor.

Question 39

Under what conditions might a return of 15% be actually worse than a return of 10%?

A)In a bull market
B)In a bear market
C)On a risk-adjusted basis
D)More than one of the above

Question 40

The measure of performance defined as the difference between a fund's excess return and a point on the market line corresponding to the fund's beta is called:

A)alpha.
B)average differential return.
C)the Jensen measure.
D)More than one of the above

Question 41

The degree of association between the independent and dependant variables is measured by:

A)the beta.
B)the standard deviation.
C)the coefficient of determination.
D)A and B

Question 42

A positive alpha is an indication of:

A)low risk.
B)high risk.
C)superior performance.
D)low diversification.

Question 43

In an index fund,

A)returns are adjusted for changes in the consumer price index.
B)funds are invested in a mutual fund that attempts to replicate the performance of a major market index.
C)investors are guaranteed returns equal to a major market index.
D)high commissions and management fees are charged because of attempts to beat the market.

Question 44

A mutual fund with excess returns very similar to those of the market will have an R² (coefficient of determination) of:

A)slightly less than 1.
B)slightly greater than 1.
C)greater than or less than one.
D)There is not enough information to tell

Question 45

Fund managers normally compare their performance to:

A)a benchmark portfolio.
B)Moody's Bond ratings.
C)the Barron's Confidence Index.
D)None of the above

Question 46

Asset allocation is generally ________________ stock selection.

A)less important than
B)more important than
C)of equal importance to
D)none of the above are true

Question 47

In examining the performance of fund managers, the return measure commonly used is:

A)the standard deviation.
B)the beta.
C)excess returns.
D)total returns.

Question 48

Benchmark portfolios are used to:

A)ensure compliance with government regulations.
B)enhance the return on portfolios.
C)reduce risk through careful hedging strategies.
D)measure and compare the performance of portfolio managers.

Question 49

The best way to measure adherence to the objectives of money managers and the financial needs of investors is:

A)to calculate the total returns on the portfolios that they manage.
B)to evaluate the risk exposure that the fund manager has accepted.
C)to calculate the dividend income that the portfolio has achieved.
D)to calculate the capital gains that the portfolio has achieveD.

Question 50

The Brinson, Hood, and Beebower (BHB) study indicated that asset managers are more likely to lose their jobs because of poor _____________ rather than poor _________.

A)asset allocation; stock selection
B)stock selection; asset allocation
C)customer relations; performance
D)performance; customer relations

Question 51

Asset allocation represents an attempt by individuals or portfolio managers to determine what?

A)percentage of assets should be distributed to beneficiaries.
B)mutual funds are appropriate for investment based on risk and return.
C)percent of funds under management should be invested in stocks, bonds, and the like.
D)brokerage houses best meet their needs.

Question 52

A firm with an alpha of .5:

A)has performed half as well as the market.
B)has performed above the market line.
C)has performed below the market line.
D)is likely to have a high beta.

Question 53

Excess returns are equal to the:

A)total portfolio return minus the beta.
B)total portfolio return minus the return on the S&P 500.
C)total portfolio return minus the risk-free rate.
D)total portfolio return minus the standard deviation.