Deck 22: Measuring Risks and Returns of Portfolio Managers

Question 1

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

Answer 1

False

Question 2

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

Answer 2

True

Question 3

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

Answer 3

False

Question 4

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

Question 5

Treynor uses beta as a measure of risk.

Question 6

Due to either superior market timing or excellence in security analysis and selection,a few portfolio managers may outperform the market over the long-term.

Question 7

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

Question 8

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

Question 9

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

Question 10

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

Question 11

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

Question 12

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

Question 13

Sharpe uses beta as a measure of risk.

Question 14

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

Question 15

Buying a mutual fund is a good way to diversify.

Question 16

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

Question 17

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

Question 18

Studies by Ippolito as well as Goodwin indicate that Mutual fund managers are superior performers.

Question 19

Alpha must always be a positive number.

Question 20

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

Question 21

If the portfolio return on a mutual fund is greater than the market return,but the Sharpe and Treynor measures are equal,then the fund manager's performance is

A)Superior
B)Inferior
C)Neither superior not inferior
D)There is not enough information to tell

Question 22

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

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

Question 23

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 24

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

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

Question 25

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

Question 26

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 27

R2is a good measure of efficient diversification.

Question 28

Most funds' performance in terms of R2is poor.

Question 29

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 30

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

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

Question 31

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

Question 32

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

Question 33

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)/beta
D)None of the above

Question 34

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 35

A return of 15 percent might actually be worse than a return of 10 percent.

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

Question 36

Firms in industries that are subject to the business cycle do not have highly variable earnings.

Question 37

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 38

Jensen uses alpha as a measure of performance.

Question 39

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 40

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 41

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,etc
D)Brokerage houses best meet their needs

Question 42

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 43

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 44

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 45

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 46

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 47

Using the Jensen approach to portfolio valuation rank the three portfolios.The market rate of return (Km)is 12 percent.

Question 48

Asset allocation is generally ________________ important then stock selection.

A)Less
B)More
C)Of equal
D)None of the above are true

Question 49

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 50

A firm that evaluates portfolios uses the Sharpe approach to measuring performance.How would it rank these three portfolios?

Question 51

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

Question 52

Benchmark portfolios are used

A)To insure 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 53

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 out perform the market on a risk adjusted basis

Question 54

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 55

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 56

A positive alpha is an indication of:

A)Low risk
B)High risk
C)Superior performance
D)Low diversification

Question 57

The Brinson,Hood and Beebower (BHB)study indicted 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 58

Assume a second firm that evaluates portfolios uses the Treynor approach to measuring performance.This firm is also evaluating the three portfolios.The portfolio betas are as shown below:

Question 59

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