Question 1

__________ developed a popular method for risk-adjusted performance evaluation of mutual funds.
A)Eugene Fama
B)Michael Jensen
C)William Sharpe
D)Jack Treynor
E)Michael Jensen, William Sharpe, and Jack Treynor

Accepted Answer

The popular method for risk-adjusted performance evaluation of mutual funds was developed by Michael Jensen, William Sharpe, and Jack Treynor. The method is known as the Sharpe ratio, Treynor ratio, and Jensen's alpha.

Question 2

Suppose two portfolios have the same average return and the same standard deviation of returns, but Buckeye Fund has a higher beta than Gator Fund.According to the Treynor measure, the performance of Buckeye Fund
A)is better than the performance of Gator Fund.
B)is the same as the performance of Gator Fund.
C)is poorer than the performance of Gator Fund.
D)cannot be measured as there are no data on the alpha of the portfolio.

Accepted Answer

The Treynor measure evaluates the returns of a portfolio relative to its beta (market risk). A higher beta implies more risk for the same level of return, thus a lower Treynor measure, indicating poorer performance.

Question 3

Suppose two portfolios have the same average return and the same standard deviation of returns, but Buckeye Fund has a lower beta than Gator Fund.According to the Treynor measure, the performance of Buckeye Fund
A)is better than the performance of Gator Fund.
B)is the same as the performance of Gator Fund.
C)is poorer than the performance of Gator Fund.
D)cannot be measured as there are no data on the alpha of the portfolio.

Accepted Answer

The Treynor measure is calculated by dividing the excess return of a portfolio over the risk-free rate by the portfolio's beta. Since Buckeye Fund has a lower beta than Gator Fund, its Treynor measure will be higher given the same excess return. Therefore, Buckeye Fund's performance is better than Gator Fund's performance according to the Treynor measure.

Question 4

Henriksson (1984) found that, on average, betas of funds __________ during market advances.
A)increased very significantly
B)increased slightly
C)decreased slightly
D)decreased very significantly

Accepted Answer

According to Henriksson (1984), betas of funds decreased slightly during market advances.

Question 5

Morningstar's RAR method I) is one of the most widely-used performance measures.
II. indicates poor performance by placing up to 5 darts next to the fund's name.
III. computes fund returns adjusted for loads.
IV. computes fund returns adjusted for risk.
V. produces ranking results that are the same as those produced with the Sharpe measure.
A)I, II, and IV
B)I, III, and IV
C)I, IV, and V
D)I, II, IV, and V

Accepted Answer

The Morningstar RAR method computes fund returns adjusted for both loads and risk, making it useful for evaluating performance. It does not indicate poor performance by placing darts next to the fund's name, as stated in option II. Lastly, while the rankings produced by the Sharpe measure may be similar to those produced by the Morningstar RAR method, this is not stated as fact in the question, making option V incorrect.

Question 6

The comparison universe is
A)a concept found only in astronomy.
B)the set of all mutual funds in the world.
C)the set of all mutual funds in the U.S.
D)a set of mutual funds with similar risk characteristics to your mutual fund.

Accepted Answer

The comparison universe refers to a set of mutual funds that have similar risk characteristics as your mutual fund. This is important when analyzing the performance of a mutual fund and comparing it to its peers. Option A is incorrect because the comparison universe can be used in other fields besides astronomy. Option B and C are too broad and do not accurately describe the concept of the comparison universe.

Question 7

Mutual funds show ____________ evidence of serial correlation, and hedge funds show ____________ evidence of serial correlation.
A)almost no; almost no
B)almost no; substantial
C)substantial; substantial
D)substantial; almost no

Accepted Answer

Mutual funds typically show almost no evidence of serial correlation, which suggests that their returns are largely random from one period to the next. Hedge funds, on the other hand, often exhibit substantial evidence of serial correlation, indicating that their returns can be somewhat predictable based on past performance, possibly due to the use of more sophisticated trading strategies or the ability to take advantage of longer-term trends.

Question 8

Suppose two portfolios have the same average return and the same standard deviation of returns, but Aggie Fund has a higher beta than Raider Fund.According to the Treynor measure, the performance of Aggie Fund
A)is better than the performance of Raider Fund.
B)is the same as the performance of Raider Fund.
C)is poorer than the performance of Raider Fund.
D)cannot be measured as there are no data on the alpha of the portfolio.

Accepted Answer

The Treynor measure evaluates the returns earned in excess of the risk-free rate per unit of market risk (beta). A higher beta indicates higher risk. Given the same average return and standard deviation, a higher beta (more risk) without higher returns means poorer performance according to the Treynor measure.

Question 9

Suppose two portfolios have the same average return and the same standard deviation of returns, but Aggie Fund has a lower beta than Raider Fund.According to the Treynor measure, the performance of Aggie Fund
A)is better than the performance of Raider Fund.
B)is the same as the performance of Raider Fund.
C)is poorer than the performance of Raider Fund.
D)cannot be measured as there are no data on the alpha of the portfolio.

Accepted Answer

The Treynor measure is calculated as the excess return of a portfolio over the risk-free rate divided by the portfolio's beta. Since Aggie Fund has a lower beta than Raider Fund but the same average return and standard deviation of returns, it must have a higher excess return over the risk-free rate. Therefore, according to the Treynor measure, Aggie Fund has better performance than Raider Fund.

Question 10

Suppose the risk-free return is 3%.The beta of a managed portfolio is 1.75, the alpha is 0%, and the average return is 16%.Based on Jensen's measure of portfolio performance, you would calculate the return on the market portfolio as
A)12.3%.
B)10.4%.
C)15.1%.
D)16.7%.

Accepted Answer

Jensen's alpha is calculated as: Actual Portfolio Return - [Risk-Free Rate + Beta * (Market Return - Risk-Free Rate)]. Given the alpha is 0%, we can set up the equation as: 0 = 16% - [3% + 1.75 * (Market Return - 3%)]. Solving for the Market Return gives us 10.4%.

Question 11

Suppose two portfolios have the same average return and the same standard deviation of returns, but Buckeye Fund has a lower beta than Gator Fund.According to the Sharpe measure, the performance of Buckeye Fund
A)is better than the performance of Gator Fund.
B)is the same as the performance of Gator Fund.
C)is poorer than the performance of Gator Fund.
D)cannot be measured as there are no data on the alpha of the portfolio.

Accepted Answer

The Sharpe Index is a measure of average portfolio returns (in excess of the risk-free return) per unit of total risk (as measured by standard deviation).

Question 12

Most professionally managed equity funds generally
A)outperform the S&P 500 Index on both raw and risk-adjusted return measures.
B)underperform the S&P 500 Index on both raw and risk-adjusted return measures.
C)outperform the S&P 500 Index on raw return measures and underperform the S&P 500 Index on risk-adjusted return measures.
D)underperform the S&P 500 Index on raw return measures and outperform the S&P 500 Index on risk-adjusted return measures.

Accepted Answer

Numerous studies show that the majority of professionally managed equity funds underperform the S&P 500 Index on both raw and risk-adjusted return measures, after taking into account their fees and expenses. While there are always exceptions and some funds may outperform the index, the overall performance of the group is generally poor.

Question 13

Hedge funds I) are appropriate as a sole investment vehicle for an investor.
II. should only be added to an already well-diversified portfolio.
III. pose performance-evaluation issues due to nonlinear factor exposures.
IV. have down-market betas that are typically larger than up-market betas.
V. have symmetrical betas.
A)I only
B)II and V
C)I, III, and IV
D)II, III, and IV

Accepted Answer

Hedge funds are typically recommended to be added to an already well-diversified portfolio rather than as a sole investment vehicle, as they can be high-risk and volatile. Performance evaluation of hedge funds can be challenging due to nonlinear factor exposures, and their down-market betas are typically larger than up-market betas. However, their betas are not necessarily symmetrical.

Question 14

Suppose a particular investment earns an arithmetic return of 10% in year 1, 20% in year 2, and 30% in year 3.The geometric average return for the period will be
A)greater than the arithmetic average return.
B)equal to the arithmetic average return.
C)less than the arithmetic average return.
D)equal to the market return.

Accepted Answer

To calculate the geometric average return, we use the formula: [(1 + r1) x (1 + r2) x (1 + r3)]^(1/3) - 1.
Plugging in the values, we get [(1 + 0.1) x (1 + 0.2) x (1 + 0.3)]^(1/3) - 1 = 0.211 or 21.1%.
The arithmetic average return is (0.1 + 0.2 + 0.3) / 3 = 0.2 or 20%.
Since the geometric average return is greater than the arithmetic average return, the best choice is C.

Question 15

Suppose the risk-free return is 6%.The beta of a managed portfolio is 1.5, the alpha is 3%, and the average return is 18%.Based on Jensen's measure of portfolio performance, you would calculate the return on the market portfolio as
A)12%.
B)14%.
C)15%.
D)16%.

Accepted Answer

Jensen’s measure is calculated as follows:

Jensen’s alpha = Portfolio Return - (Risk-free rate + Beta * (Market Return - Risk-free rate))

Given:
Risk-free rate = 6%
Beta = 1.5
Portfolio Return = 18%
Jensen’s alpha = 3%

Rearranging the above formula, we get:

Market Return = Risk-free rate + ((Portfolio Return - Risk-free rate) / Beta) - (Jensen’s alpha / Beta)

Putting the given values in the formula, we get:

Market Return = 6% + ((18% - 6%) / 1.5) - (3% / 1.5) = 12%

Therefore, the return on the market portfolio would be 12%. Answer choice A is the correct choice.

Question 16

The comparison universe is not
A)a concept found only in astronomy.
B)the set of all mutual funds in the world.
C)the set of all mutual funds in the U.S.
D)a set of mutual funds with similar risk characteristics to your mutual fund.
E)a concept found only in astronomy, the set of all mutual funds in the world, or the set of all mutual funds in the U.S.

Accepted Answer

The comparison universe refers to a specific set of items, entities, or data points that are used as a benchmark or reference to evaluate or compare similar items, entities, or data points. It is not exclusive to any single field such as astronomy or limited to all mutual funds globally or in the U.S. Instead, it can be applied in various contexts, including finance, where it might refer to a set of mutual funds with similar risk characteristics for comparison purposes.

Question 17

Suppose the risk-free return is 4%.The beta of a managed portfolio is 1.2, the alpha is 1%, and the average return is 14%.Based on Jensen's measure of portfolio performance, you would calculate the return on the market portfolio as
A)11.5%.
B)14%.
C)15%.
D)16%.

Accepted Answer

Jensen's alpha is calculated as the difference between the actual returns of the portfolio and the expected returns given the portfolio's beta and the risk-free rate. The expected return based on the Capital Asset Pricing Model (CAPM) is calculated as: Risk-free rate + Beta * (Market return - Risk-free rate). Given the alpha is 1%, the actual return is 14%, and the risk-free rate is 4%, we can set up the equation: 14% = 4% + 1.2 * (Market return - 4%) + 1%. Solving for the market return gives us 11.5%.

Question 18

Suppose two portfolios have the same average return and the same standard deviation of returns, but Aggie Fund has a higher beta than Raider Fund.According to the Sharpe measure, the performance of Aggie Fund
A)is better than the performance of Raider Fund.
B)is the same as the performance of Raider Fund.
C)is poorer than the performance of Raider Fund.
D)cannot be measured as there are no data on the alpha of the portfolio.

Accepted Answer

The Sharpe ratio measures the performance of an investment compared to a risk-free asset, after adjusting for its risk. It is calculated as the difference between the returns of the investment and the risk-free return, divided by the standard deviation of the investment returns. Since both funds have the same average return and the same standard deviation of returns, their Sharpe ratios would be the same, regardless of their betas. Beta measures systematic risk, not the risk-adjusted return, which is what the Sharpe ratio evaluates.

Question 19

Suppose two portfolios have the same average return and the same standard deviation of returns, but Buckeye Fund has a higher beta than Gator Fund.According to the Sharpe measure, the performance of Buckeye Fund
A)is better than the performance of Gator Fund.
B)is the same as the performance of Gator Fund.
C)is poorer than the performance of Gator Fund.
D)cannot be measured as there are no data on the alpha of the portfolio.

Accepted Answer

The Sharpe ratio measures the performance of an investment compared to a risk-free asset, after adjusting for its risk. It is calculated as the difference between the returns of the investment and the risk-free return, divided by the standard deviation of the investment returns. Since both funds have the same average return and the same standard deviation of returns, their Sharpe ratios would be the same, regardless of their betas. Beta measures systematic risk, not the risk-adjusted return, which is what the Sharpe ratio measures.

Question 20

Suppose you purchase 100 shares of GM stock at the beginning of year 1 and purchase another 100 shares at the end of year 1.You sell all 200 shares at the end of year 2.Assume that the price of GM stock is $50 at the beginning of year 1, $55 at the end of year 1, and $65 at the end of year 2.Assume no dividends were paid on GM stock.Your dollar-weighted return on the stock will be __________ your time-weighted return on the stock.
A)higher than
B)the same as
C)less than
D)exactly proportional to

Accepted Answer

The dollar-weighted return takes into account the amount of money invested at each point in time, while the time-weighted return does not. In this case, the dollar-weighted return will be higher than the time-weighted return because the investor purchased more shares at a higher price in year 1.

Quiz 24: Portfolio Performance Evaluation

__________ developed a popular method for risk-adjusted performance evaluation of mutual funds.

Suppose two portfolios have the same average return and the same standard deviation of returns, but Buckeye Fund has a higher beta than Gator Fund.According to the Treynor measure, the performance of Buckeye Fund

Suppose two portfolios have the same average return and the same standard deviation of returns, but Buckeye Fund has a lower beta than Gator Fund.According to the Treynor measure, the performance of Buckeye Fund

Henriksson (1984) found that, on average, betas of funds __________ during market advances.

The comparison universe is

Mutual funds show evidence of serial correlation, and hedge funds show evidence of serial correlation.

Suppose two portfolios have the same average return and the same standard deviation of returns, but Aggie Fund has a higher beta than Raider Fund.According to the Treynor measure, the performance of Aggie Fund

Suppose two portfolios have the same average return and the same standard deviation of returns, but Aggie Fund has a lower beta than Raider Fund.According to the Treynor measure, the performance of Aggie Fund

Suppose the risk-free return is 3%.The beta of a managed portfolio is 1.75, the alpha is 0%, and the average return is 16%.Based on Jensen's measure of portfolio performance, you would calculate the return on the market portfolio as

Suppose two portfolios have the same average return and the same standard deviation of returns, but Buckeye Fund has a lower beta than Gator Fund.According to the Sharpe measure, the performance of Buckeye Fund

Most professionally managed equity funds generally

Suppose a particular investment earns an arithmetic return of 10% in year 1, 20% in year 2, and 30% in year 3.The geometric average return for the period will be

Suppose the risk-free return is 6%.The beta of a managed portfolio is 1.5, the alpha is 3%, and the average return is 18%.Based on Jensen's measure of portfolio performance, you would calculate the return on the market portfolio as

The comparison universe is not

Suppose the risk-free return is 4%.The beta of a managed portfolio is 1.2, the alpha is 1%, and the average return is 14%.Based on Jensen's measure of portfolio performance, you would calculate the return on the market portfolio as

Suppose two portfolios have the same average return and the same standard deviation of returns, but Aggie Fund has a higher beta than Raider Fund.According to the Sharpe measure, the performance of Aggie Fund

Suppose two portfolios have the same average return and the same standard deviation of returns, but Buckeye Fund has a higher beta than Gator Fund.According to the Sharpe measure, the performance of Buckeye Fund