Deck 18: Portfolio Performance Evaluation

Question 1

The average returns, standard deviations and betas for three funds are given below along with data for the S&P 500 index. The risk-free return during the sample period is 6%. You wish to evaluate the three mutual funds using the Treynor measure for performance evaluation. The fund with the highest Treynor measure of performance is ________.

A)Fund A
B)Fund B
C)Fund C
D)indeterminable

Answer 1

B

Question 2

Which one of the following averaging methods is the preferred method of constructing returns series for use in evaluating portfolio performance?

A)Geometric average
B)Arithmetic average
C)Dollar-weighted
D)Internal

Answer 2

A

Question 3

The average returns, standard deviations and betas for three funds are given below along with data for the S&P 500 index. The risk-free return during the sample period is 6%. You wish to evaluate the three mutual funds using the Jensen measure for performance evaluation. The fund with the highest Jensen measure of performance is ________.

A)Fund A
B)Fund B
C)Fund C
D)S&P500

Answer 3

B

Question 4

A managed portfolio has a standard deviation equal to 22% and a beta of 0.9 when the market portfolio's standard deviation is 26%. The adjusted portfolio P________ needed to calculate the M² measure will have ________ invested in the managed portfolio and the rest in T-bonds.

A)84.6%
B)118%
C)18%
D)15.4%

Question 5

The average returns, standard deviations and betas for three funds are given below along with data for the S&P 500 index. The risk-free return during the sample period is 6%. You wish to evaluate the three mutual funds using the Sharpe measure for performance evaluation. The fund with the highest Sharpe measure of performance is ________.

A)Fund A
B)Fund B
C)Fund C
D)indeterminable

Question 6

Probably the biggest problem with evaluating portfolio performance of actively managed funds is the assumption that ________.

A)the markets are efficient
B)portfolio risk is constant over time
C)diversification pays off
D)security selection is more valuable than asset allocation

Question 7

The M² measure is a variant of ________.

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

Question 8

The ________ calculates the reward-to-risk trade-off by dividing the average portfolio excess return by the portfolio beta.

A)Sharpe measure
B)Treynor measure
C)Jensen measure
D)appraisal ratio

Question 9

Which one of the following performance measures is the Sharpe measure?

A)Average excess return to beta ratio
B)Average excess return to standard deviation ratio
C)Alpha to standard deviation of residuals ratio
D)Average return minus required return

Question 10

Which one of the following is largely based on forecasts of macroeconomic factors?

A)Security selection
B)Passive investing
C)Market efficiency
D)Market timing

Question 11

Your return will generally be higher using the ________ if you time your transactions poorly and your return will generally be higher using the ________ if you time your transactions well.

A)dollar-weighted return method; dollar-weighted return method
B)dollar-weighted return method; time-weighted return method
C)time-weighted return method; dollar-weighted return method
D)time-weighted return method; time-weighted return method

Question 12

Consider the Sharpe and Treynor performance measures. When a pension fund is large and well diversified in total and it has many managers, the ________ measure is better for evaluating individual managers while the ________ measure is better for evaluating the manager of a small fund with only one manager responsible for all investments that may not be fully diversified.

A)Sharpe; Sharpe
B)Sharpe; Treynor
C)Treynor; Sharpe
D)Treynor; Treynor

Question 13

The comparison universe is ________.

A)the bogey portfolio
B)a set of mutual funds with similar risk characteristics to your mutual fund
C)the set of all mutual funds in the USA
D)the set of all mutual funds in the world

Question 14

The risk-free rate, average returns, standard deviations and betas for three funds and the S&P500 are given below. What is the M² measure for Portfolio B?

A)0.43%
B)1.25%
C)1.77%
D)1.43%

Question 15

Suppose that over the same period two portfolios have the same average return and the same standard deviation of return, 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 since there is no data on the alpha of the portfolio

Question 16

The risk-free rate, average returns, standard deviations and betas for three funds and the S&P500 are given below. What is the T² measure for Portfolio A?

A)12.4%
B)2.38%
C)0.91%
D)3.64%

Question 17

Perfect timing ability is equivalent to having ________ on the market portfolio.

A)a call option
B)a futures contract
C)a put option
D)a forward contract

Question 18

The M² measure of portfolio performance was developed by ________.

A)Modigliani and Treynor
B)Modigliani and Modigliani
C)Merton and Miller
D)Fama and French

Question 19

Henriksson found that, on average, betas of funds ________ during market advances.

A)decreased slightly
B)decreased very significantly
C)increased slightly
D)increased very significantly

Question 20

The contribution of security selection within asset classes to the total excess return was ________.

A)1.5%
B)2.0%
C)2.5%
D)3.5% (.12 - .10.20 + (.1700 - .1500).80 = .0200

Question 21

The critical variable in the determination of the success of the active portfolio is the share's ________.

A)alpha/non-systematic risk
B)alpha/systematic risk
C)delta/non-systematic risk
D)delta/systematic risk

Question 22

Assume you purchased a rental property for $100 000 and sold it one year later for $115 000 (there was no mortgage on the property). At the time of the sale, you paid $3 000 in commissions and $1 000 in taxes. If you received $10 000 in rental income (all received at the end of the year), what annual rate of return did you earn?

A)6%
B)11%
C)20%
D)25%

Question 23

The market timing form of active portfolio management relies on ________ forecasting and the security selection form of active portfolio management relies on ________ forecasting.

A)macroeconomic; macroeconomic
B)macroeconomic; microeconomic
C)microeconomic; macroeconomic
D)microeconomic; microeconomic

Question 24

Shares A and B have alphas of .01 and betas of .90. Share A has a residual variance of .020 while share B has a residual variance of .016. If Share A represents 2% of an active portfolio, share B should represent ________ of an active portfolio.

A)1.6%
B)2.0%
C)2.2%
D)2.5%

Question 25

Consider the theory of active portfolio management. Shares A and B have the same beta and non-systematic risk. Share A has higher positive alpha than share B. You should want ________ in your active portfolio.

A)equal proportions of shares A and B
B)more of Share A than Share B
C)more of Share B than Share A
D)more information is needed to answer this question

Question 26

Active portfolio managers try to construct a risky portfolio with ________.

A)a higher Sharpe measure than a passive strategy
B)a lower Sharpe measure than a passive strategy
C)the same Sharpe measure as a passive strategy
D)very few securities

Question 27

The correct measure of timing ability is ________ for a portfolio manager who correctly forecasts 55% of bull markets and 55% of bear markets.

A)-5%
B)5%
C)10%
D)95%

Question 28

The table presents the actual return of each sector of the manager's portfolio in column (1), the fraction of the portfolio allocated to each sector in column (2), the benchmark or neutral sector allocations in column (3) and the returns of sector indexes in column (4). What was the bogey's return in the month?

A)2.07%
B)2.21%
C)2.24%
D)4.80%

Question 29

The table presents the actual return of each sector of the manager's portfolio in column (1), the fraction of the portfolio allocated to each sector in column (2), the benchmark or neutral sector allocations in column (3) and the returns of sector indexes in column (4). What was the manager's return in the month?

A)2.07%
B)2.21%
C)2.24%
D)4.80%

Question 30

A market timing strategy is one where asset allocation in the share market ________ when one forecasts the share market will outperform treasury bonds.

A)decreases
B)increases
C)remains the same
D)may increase or decrease

Question 31

Portfolio managers Paul Martin and Kevin Krueger each manage $1 000 000 funds. Paul Martin has perfect foresight and the call option value of his perfect foresight is $150 000. Kevin Krueger is an imperfect forecaster and correctly predicts 50% of all bull markets and 70% of all bear markets. The correct measure of timing ability for Kevin Krueger is ________.

A)20%
B)60%
C)75%
D)120%

Question 32

If an investor is a successful market timer, his distribution of monthly portfolio returns will ________.

A)be skewed to the left
B)be skewed to the right
C)exhibit kurtosis
D)exhibit neither skewedness nor kurtosis

Question 33

Consider the theory of active portfolio management. Shares A and B have the same positive alpha and the same non-systematic risk. Share A has a higher beta than share B. You should want ________ in your active portfolio.

A)equal proportions of Shares A and B
B)more of Share A than Share B
C)more of Share B than Share A
D)more information is needed to answer this question

Question 34

It is very hard to statistically verify abnormal fund performance because of all except which one of the following?

A)Inevitably some fund managers experience streaks of good performance that may just be due to luck
B)The noise in realised rates of return is so large as to make it hard to identify abnormal performance in competitive markets
C)Portfolio composition is rarely stable long enough to identify abnormal performance
D)Even if successful, there is really not much value to be added by active strategies such as market timing

Question 35

A passive benchmark portfolio is ________.
I) a portfolio where the asset allocation across broad asset classes is neutral and not determined by forecasts of performance of the different asset classes
II) one where an indexed portfolio is held within each asset class
III) often called the bogey

A)I only
B)I and III only
C)II and III only
D)I, II and III

Question 36

Portfolio performance is often decomposed into various subcomponents such as the return due to ________.
I) broad asset allocation across security classes
II) sector weightings within equity markets
III) security selection with a given sector
The decision that contributes most to the fund performance is:

A)I
B)II
C)III
D)All contribute equally to fund performance

Question 37

Portfolio managers Paul Martin and Kevin Krueger each manage $1 000 000 funds. Paul Martin has perfect foresight and the call option value of his perfect foresight is $150 000. Kevin Krueger is an imperfect forecaster and correctly predicts 50% of all bull markets and 70% of all bear markets. The value of Kevin Krueger's imperfect forecasting ability is ________.

A)$30 000
B)$67 500
C)$108 750
D)$217 500

Question 38

In the Treynor-Black model, the weight of each analysed security in the portfolio should be proportional to its ________.

A)alpha/beta
B)alpha/residual variance
C)beta/residual variance
D)none of the above

Question 39

Active portfolio management consists of ________.
I) market timing
II) security selection
III) sector selection within given markets
IV) indexing

A)I and II only
B)II and III only
C)I, II and III only
D)I, II, III and IV

Question 40

In performance measurement the bogey portfolio is designed to ________.

A)measure the returns to a completely passive strategy
B)measure the returns to a similar active strategy
C)measure the returns to a given investment style
D)equal the return on the S&P500

Question 41

What is the contribution of security selection to relative performance?

A)-0.15%
B)0.15%
C)-0.3%
D)0.3%

Question 42

Morningstar's RAR produce results which are similar but not identical to ________.

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

Question 43

Empirical tests to date show ________.

A)that many investors have earned large rewards by market timing
B)little evidence of market timing ability
C)clear cut evidence of substantial market timing ability
D)evidence that absolutely no market timing ability exists

Question 44

A portfolio generates an annual return of 13%, a beta of 0.7 and a standard deviation of 17%. The market index return is 14% and has a standard deviation of 21%. What is Jensen's alpha of the portfolio if the risk-free rate is 5%?

A).017
B).034
C).067
D).078

Question 45

A portfolio generates an annual return of 17%, a beta of 1.2 and a standard deviation of 19%. The market index return is 12% and has a standard deviation of 16%. What is the M² measure of the portfolio if the risk-free rate is 4%?

A)2.15%
B)2.76%
C)2.94%
D)3.14%

Question 46

Consider the theory of active portfolio management. Shares A and B have the same beta and the same positive alpha. Share A has higher non-systematic risk than share B. You should want ________ in your active portfolio.

A)equal proportions of shares A and B
B)more of Share A than Share B
C)more of Share B than Share A
D)more information is needed to answer this question

Question 47

A portfolio generates an annual return of 13%, a beta of 0.7 and a standard deviation of 17%. The market index return is 14% and has a standard deviation of 21%. What is the Sharpe measure of the portfolio if the risk-free rate is 5%?

A).3978
B).4158
C).4563
D).4706

Question 48

A portfolio generates an annual return of 13%, a beta of 0.7 and a standard deviation of 17%. The market index return is 14% and has a standard deviation of 21%. What is the Treynor measure of the portfolio if the risk-free rate is 5%?

A).1143
B).1233
C).1354
D).1477

Question 49

A portfolio generates an annual return of 13%, a beta of 0.7 and a standard deviation of 17%. The market index return is 14% and has a standard deviation of 21%. What is the M² measure of the portfolio if the risk-free rate is 5%?

A)0.58%
B)0.68%
C)0.78%
D)0.88%

Question 50

An attribution analysis will NOT likely contain which of the following components?

A)Asset allocation
B)Index returns
C)Risk-free returns
D)Security selection

Question 51

The portfolio that contains the benchmark asset allocation against which a manager will be measured is often called ________.

A)the bogey portfolio
B)the Vanguard Index
C)Jensen's alpha
D)the Treynor measure

Question 52

What is the contribution of asset allocation to relative performance?

A)-0.18%
B)0.18%
C)-0.15%
D)0.15%

Question 53

What was the manager's over- or under-performance for the month?

A)Under-performance = 0.03%
B)Over-performance = 0.03%
C)Over-performance = 0.14%
D)Under-performance = 3%

Question 54

A fund has excess performance of 1.5%. In looking at the fund's investment breakdown you see that the fund overweighed equities relative to the benchmark and the average return on the fund's equity portfolio was slightly lower than the equity benchmark return. The excess performance for this fund is probably due to ________.

A)security selection ability
B)better sector weightings in the equity portfolio
C)the asset allocation decision
D)finding securities with positive alphas