Question 1

Which of the following are reasons to consider selling an investment that is currently in a portfolio?
I. The investment has met the original objective.
II. Better investment opportunities currently exist.
III. The outlook for the investment has improved.
IV. The investment has not met expectations and no change is expected.

Accepted Answer

Reasons to consider selling an investment include when it has met its original objective (I), when better investment opportunities exist (II), and when it has not met expectations with no change expected (IV). An improved outlook for the investment (III) is typically a reason to hold or buy more, not sell.

Question 2

Which of the following is a "higher the better" measure?

Accepted Answer

All three measures, Sharpe's, Treynor's, and Jensen's, are used to evaluate the performance of investment portfolios, with higher values indicating better performance. Sharpe's measure evaluates risk-adjusted return by comparing the excess return of an investment to its standard deviation of returns. Treynor's measure also assesses risk-adjusted return but uses beta (market risk) instead of standard deviation. Jensen's measure, or alpha, indicates the abnormal return of a portfolio beyond what is predicted by the capital asset pricing model (CAPM), with higher values showing better performance.

Question 3

One year ago, Matt bought 100 shares of ACE Corp. stock for $5,619 including commission. He is about to sell the ACE stock for $6,528 net of commissions. When he made the purchase the S&P 500 index was at 907; now it is 1070. The beta of ACE stock is 0.98, and the market's risk-free rate is 4.0%. No dividends were paid. Based on Jensen's measure, did Matt make a good purchase?

Accepted Answer

The answer of One year ago, Matt bought 100 shares...

Question 4

Treynor's measure of portfolio performance focuses on

Accepted Answer

Treynor's measure of portfolio performance evaluates the returns of a portfolio relative to its beta, or nondiversifiable risk, rather than its total risk or its diversifiable risk. This measure is particularly useful for comparing the performance of portfolios or funds that have different levels of market risk.

Question 5

Ella's portfolio has a beta of 1.34 and a standard deviation of 16.4%. The portfolio has a total return of 14.8%. The market risk premium is 8.5%, while the return on the market portfolio was 12.0%. What is the value of Sharpe's measure for Ella's portfolio?

Accepted Answer

The answer of Ella's portfolio has a beta of 1.34...

Question 6

A portfolio has a total return of 14.4%, a standard deviation of 18.5% and a beta of 1.43. The risk free rate is 2.5%, the market rate of return is 11.4%, and the market's Treynor measure is 6.3. What is the value of the Treynor measure of this portfolio?

Accepted Answer

The Treynor measure is calculated as (Portfolio Return - Risk-Free Rate) / Portfolio Beta. For this portfolio, it would be (14.4% - 2.5%) / 1.43 = 11.9% / 1.43 = 8.32%.

Question 7

Sharpe's measure of portfolio performance compares the risk premium on a portfolio to

Accepted Answer

Sharpe's measure of portfolio performance compares the risk premium on a portfolio (the return of the portfolio minus the risk-free rate) to the portfolio's standard deviation of return. This ratio helps to understand how much excess return is being received for the extra volatility that an investor takes on by holding a risky asset.

Question 8

Allison's portfolio has a beta of 1.5 and earns a return of 15%. Brianna's portfolio has a beta of 1.0 and earns a return of 11%. The risk-free rate is 3%. According to the Treynor measure,

Accepted Answer

The answer of Allison's portfolio has a beta of 1.5...

Question 9

Portfolio revision is the ongoing process of systematically studying the issues in the portfolio and selling certain issues and purchasing others as the means of maintaining a portfolio that best meets the investor's objectives.

Accepted Answer

Portfolio revision involves analyzing the current portfolio to ensure it aligns with the investor's goals, risk tolerance, and investment horizon. It may require selling some investments and buying others to maintain or improve the portfolio's performance and adherence to the investor's objectives.

Question 10

Which of the following statements about Jensen's measure are correct?
I. Through its use of the capital asset pricing model, Jensen's measure automatically adjusts for market return.
II. In general, the higher the Jensen's measure, the better a portfolio has performed.
III. Jensen's measure is referred to as alpha.
IV. A positive Jensen's measure indicates an investment has underperformed the market on a risk-adjusted basis.

Accepted Answer

Jensen's measure, also known as alpha, evaluates the excess returns of a portfolio over the expected market returns, as predicted by the capital asset pricing model (CAPM). Therefore, it does adjust for market return (I), and a higher Jensen's measure indeed indicates better performance (II). Since it is referred to as alpha (III), these statements are correct. A positive Jensen's measure actually indicates that an investment has outperformed the market on a risk-adjusted basis, making statement IV incorrect.

Question 11

The process of selling certain issues in a portfolio and purchasing new ones to replace them is known as

Accepted Answer

Portfolio revision involves selling certain investments and buying new ones to realign the portfolio with the investor's goals, risk tolerance, or investment strategy.

Question 12

Allison's portfolio has an expected return of 14% and a standard deviation of 20%. Brianna's portfolio has an expected rate of return of 11% and a standard deviation of 12%. The risk-free rate is 3%. According to the Sharpe measure,

Accepted Answer

The Sharpe ratio is calculated as (Expected Portfolio Return - Risk-Free Rate) / Standard Deviation of Portfolio. For Allison, it's (14% - 3%) / 20% = 0.55. For Brianna, it's (11% - 3%) / 12% = 0.67. Since Brianna's Sharpe ratio is higher, her portfolio is considered better according to the Sharpe measure.

Question 13

Zachary holds 15 stocks in his portfolio. The portfolio's return last year was 11%, but one stock, RJH, doubled in value. What should Zachary do if he wants to be as diversified as he was at the beginning of the year?

Accepted Answer

To maintain the same level of diversification as at the beginning of the year, Zachary should sell some of the RJH stock because its value doubling means it now makes up a larger portion of his portfolio than it did initially, reducing his diversification.

Question 14

The Witney Growth Fund, a no-load mutual fund, had a net asset value per share of $54.28 one year ago. Its current net asset value is $56.93. During the year it paid out dividends and capital gains of $2.08 per share. It has a beta value of 1.75. Over the same period the market return was 6.4% and the risk-free rate of return was 3.5%.
(a) Calculate Treynor's measure for the Witney Growth Fund. (Show all work.)
(b) Based on Treynor's measure, how did the fund perform in relation to the overall market?

Accepted Answer

The answer of The Witney Growth Fund, a no-load mutual...

Question 15

A portfolio has a total return of 14.5%, a beta of 1.54, and a standard deviation of 17.6%. If the risk free rate is 4.5% and the market return is 10.2%, then Treynor's measure of this portfolio's performance is

Accepted Answer

The answer of A portfolio has a total return of...

Question 16

A portfolio has a total return of 10.5%, a beta of 0.72 and a standard deviation of 6.3%. The risk free rate is 3.8%, the market return is 12.4%. Jensen's measure of this portfolio's performance is

Accepted Answer

Jensen's Alpha is calculated as: α = Rp - [Rf + β(Rm - Rf)], where Rp is the portfolio return, Rf is the risk-free rate, β is the beta of the portfolio, and Rm is the market return. Plugging in the given values: α = 10.5% - [3.8% + 0.72(12.4% - 3.8%)] = 10.5% - [3.8% + 6.2%] = 10.5% - 10% = 0.5%.

Question 17

Which one of the following statements is correct if a portfolio has a Jensen measure of return of zero?

Accepted Answer

The Jensen measure (or Jensen's alpha) indicates how much of the portfolio's rate of return is attributable to the manager's ability to deliver above-average returns, adjusted for market risk. A Jensen measure of zero means that the portfolio earned exactly its expected return on a risk-adjusted basis, neither underperforming nor outperforming the market.

Question 18

Phil has a portfolio with a 13.2% total return. The beta of the portfolio is 1.48 and the standard deviation is 13%. Currently, the risk-free rate of return is 4% and the overall market has a total return of 11%. What is the value of Treynor's measure for Phil's portfolio?

Accepted Answer

Treynor's measure is calculated as (Portfolio return - Risk-free rate) / Beta. For Phil's portfolio, it would be (13.2% - 4%) / 1.48 = 6.2%.

Question 19

The Sharpe's measure for Jane Smith's investment portfolio is 0.40, while the Sharpe's measure for the market is 0.30. This information suggests that Smith's portfolio

Accepted Answer

The Sharpe ratio measures the performance of an investment compared to a risk-free asset, after adjusting for its risk. A higher Sharpe ratio indicates a better risk-adjusted return. Since Jane Smith's portfolio has a Sharpe ratio of 0.40, compared to the market's 0.30, it means her portfolio has a superior performance per unit of risk than the market.

Question 20

Allison's portfolio has a beta of 1.37 and earns a return of 14%. Brianna's portfolio has a beta of 0.8 and earns a return of 11%. The risk-free rate is 3% and the expected rate of return on the market is 12%. According to the Jensen's measure,

Accepted Answer

The answer of Allison's portfolio has a beta of 1.37...

Quiz 13: Managing Your Own Portfolio