Deck 22: Evaluation of Investment Performance: a Global Concept

Question 1

Under Jensen's differential return approach to portfolio evaluation, superior market timing is exhibited by a

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

Answer 1

A

Question 2

The following information is to be used to answer questions 13-17.
$\begin{array}{llcc}\underline{ \text { SD }} &\underline{ \text {Beta }}&\underline{ \text {alpha }}&\underline{ \text { \(\mathrm{R}^{2}\)}} \\ \text { Fund 11.97 } &1.0&1.3&0.95\\ \text { Fund 22.94 } &0.8&0.6^*&0.80\\ \text { Fund 33.82} &1.2&-3.5&0.90\\ \text { Fund 44.70 } &1.4&4.2&065\\ &\\\end{array}$
$\text { *Significant at the } 5 \text { percent level }$

-Which of these four funds had the largest total risk?

A) Fund 1 Solution: Fund 4 has the highest standard
B) Fund 2 deviation
C) Fund 3
D) Fund 4

Answer 2

Fund 4

Question 3

Which of the following indices would be 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.

Answer 3

B

Question 4

The following information is to be used to answer questions 13-17.
$\begin{array}{llcc}\underline{ \text { SD }} &\underline{ \text {Beta }}&\underline{ \text {alpha }}&\underline{ \text { \(\mathrm{R}^{2}\)}} \\ \text { Fund 11.97 } &1.0&1.3&0.95\\ \text { Fund 22.94 } &0.8&0.6^*&0.80\\ \text { Fund 33.82} &1.2&-3.5&0.90\\ \text { Fund 44.70 } &1.4&4.2&065\\ &\\\end{array}$
$\text { *Significant at the } 5 \text { percent level }$

-Which of these funds had the highest performance as determined by Jensen's performance measure?

A) Fund 1
B) Fund 2
C) Fund 3
D) Fund 4
Solution: Fund 2 has the only positive and statistically significant alpha

Question 5

The reward-to-variability 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 the risk-free rate.

Question 6

Select the CORRECT statement about the reward-to-variability ratio (RVAR).

A) RVAR is an absolute measure of performance.
B) RVAR measures the slope of the line from RF to the portfolio being evaluated.
C) The closer the RVAR to 0.0, the better is the performance.
D) RVAR does not take into account how well diversified a portfolio was.

Question 7

The reward-to-volatility ratio measures the excess return per unit of

A) total risk.
B) systematic risk.
C) market risk.
D) systemic risk.

Question 8

The __________ indicates the percentage of the variance in the portfolio's returns explained by the market's returns.

A) standard deviation
B) coefficient of determination
C) beta
D) alpha

Question 9

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

Question 10

The following information is to be used to answer questions 13-17.
$\begin{array}{llcc}\underline{ \text { SD }} &\underline{ \text {Beta }}&\underline{ \text {alpha }}&\underline{ \text { \(\mathrm{R}^{2}\)}} \\ \text { Fund 11.97 } &1.0&1.3&0.95\\ \text { Fund 22.94 } &0.8&0.6^*&0.80\\ \text { Fund 33.82} &1.2&-3.5&0.90\\ \text { Fund 44.70 } &1.4&4.2&065\\ &\\\end{array}$
$\text { *Significant at the } 5 \text { percent level }$

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

A) Fund 1 Solution: Fund 1 has highest R².
B) Fund 2
C) Fund 3
D) Fund 4

Question 11

Which is the better measure to estimate the performance of a well-diversified portfolio in relation to the market index?

A) Sharpe's RVAR
B) Treynor's RVOL
C) Total return (alone)
D) Portfolio beta (alone)

Question 12

Superior portfolio performance can result from

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

Question 13

The following information is to be used to answer questions 13-17.
$\begin{array}{llcc}\underline{ \text { SD }} &\underline{ \text {Beta }}&\underline{ \text {alpha }}&\underline{ \text { \(\mathrm{R}^{2}\)}} \\ \text { Fund 11.97 } &1.0&1.3&0.95\\ \text { Fund 22.94 } &0.8&0.6^*&0.80\\ \text { Fund 33.82} &1.2&-3.5&0.90\\ \text { Fund 44.70 } &1.4&4.2&065\\ &\\\end{array}$
$\text { *Significant at the } 5 \text { percent level }$

-Which of these four funds had the largest market risk?

A) Fund 1 Solution: Fund 4 has the highest beta.
B) Fund 2
C) Fund 3
D) Fund 4

Question 14

The major question when evaluating the performance of a portfolio is:

A) "Does the portfolio match the investor characteristics of the individual investor?"
B) "Does the expected return of the portfolio meet the needs of the individual investor?"
C) "Is the return on the portfolio adequate to compensate for the risk taken?"
D) "Is the risk on the portfolio in line with the personal characteristics of the investor?"

Question 15

The following information is to be used to answer questions 13-17.
$\begin{array}{llcc}\underline{ \text { SD }} &\underline{ \text {Beta }}&\underline{ \text {alpha }}&\underline{ \text { \(\mathrm{R}^{2}\)}} \\ \text { Fund 11.97 } &1.0&1.3&0.95\\ \text { Fund 22.94 } &0.8&0.6^*&0.80\\ \text { Fund 33.82} &1.2&-3.5&0.90\\ \text { Fund 44.70 } &1.4&4.2&065\\ &\\\end{array}$
$\text { *Significant at the } 5 \text { percent level }$

-Which of these funds was least well diversified?

A) Fund 1
B) Fund 2
C) Fund 3
D) Fund 4
Solution: Fund 4 has the smallest R².

Question 16

The Global Investment Performance Standards () were created by:

A) CFA Institute, the successor to AIMR.
B) Russell/Mellon Financial, now Bank of New York Mellon Financial
C) Morningstar.
D) MSCI.

Question 17

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's Reward to Volatility.
C) M2.
D) Sharpe Ratio.

Question 18

The --------------------- is the legitimate alternative to a portfolio that accurately reflects the objectives of the portfolio owners.

A) market average index
B) efficient portfolio
C) benchmark portfolio
D) performance standard

Question 19

Which one of the following statements is true? Notation: RVAR: Sharpe's reward-to-variability measure
RVOL: Treynor's reward-to-volatility measure

A) RVOL is based on total risk while RVAR is based on systematic risk.
B) RVAR is based on total risk while RVOL is based on systematic risk.
C) RVAR is based on unsystematic risk while RVOL is based on systematic risk.
D) RVOL is based on systematic risk while RVAR is based on unsystematic risk.

Question 20

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 means of identifying superior or inferior portfolio performance
D) The actual excess return on a portfolio during one period

Question 21

The --------------------- has issued minimum standards for investment performance.

A) FINRA, formerly known as the National Association of Security Dealers
B) Securities Exchange Commission (SEC)
C) Association for Security Analysts and Portfolio Managers
D) Chartered Financial Analyst Institute, formerly known as the Association for Investment Management and Research

Question 22

One approach to style analysis which uses the stocks in a portfolio to describe the fund's allocation among asset classes 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 dollar-weighted rate of return is equivalent to the internal rate of return.

Question 24

One problem with style analysis is style:

A) consistency.
B) comparability.
C) correctness.
D) character.

Question 25

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

Question 26

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

Question 27

Jensen's alpha measures the contribution of the portfolio manager.

Question 28

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

Question 29

The higher the RVAR, the better the risk-adjusted portfolio performance.

Question 30

Which of the following is true regarding Modigliani-squared?

A) It compares Treasury bills to the S&P 500 Index.
B) It states its results in both percentage and graphical form.
C) It equates the volatility of a portfolio with the market.
D) It compares fixed income securities with equities securities.

Question 31

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

Question 32

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

Question 33

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

Question 34

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

Question 35

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

Question 36

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

Question 37

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

Question 38

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

Question 39

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 40

GIPS presentation standards require

A) a 5-year performance record, or since inception if the fund is less than 5-years old.
B) inclusion of terminated portfolios.
C) cash accounting.
D) exclusion of cash and cash equivalents.

Question 41

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 performance measure or the Treynor performance measure for the portfolio?

Question 42

Sharpe's RVAR 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 43

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

Question 44

What is performance attribution?

Question 45

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

Question 46

Time-weighted as opposed to dollar-weighted return captures rate of return actually earned by the portfolio manager.

Question 47

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

Question 48

Discuss how constraints on portfolio managers affect the portfolio results.

Question 49

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

Question 50

How is regression analysis used to measure portfolio diversification?

Question 51

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

Question 52

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

Question 53

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 54

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