Question 1

Under the performance attribution analysis method,the ____ measures the manager's ability to form specific market segment portfolios that generate superior returns relative to the way in which the comparable market segment is defined in the benchmark portfolio weighted by the manager's actual market segment investment proportions.

Accepted Answer

The selection effect measures a manager's ability to select individual securities within a given market segment that outperform the benchmark, and also the ability to avoid underperforming securities. The allocation effect, on the other hand, measures the impact of the manager's decision to underweight or overweight a particular market segment compared to the benchmark. The distribution and diversification effects are not commonly used in performance attribution analysis methods. The attribution effect is a broader term that encompasses both the selection and allocation effects.

Question 2

The most common manner of evaluating portfolio managers is a peer group comparison.

Accepted Answer

Peer group comparison is a common way of evaluating portfolio managers as it helps to benchmark their performance against their peers in the industry.

Question 3

The Sharpe measure of portfolio performance divides the portfolio's risk premium by the portfolio's beta.

Accepted Answer

The Sharpe ratio measures a portfolio's performance by dividing the portfolio's excess return (risk premium) over the risk-free rate by the portfolio's standard deviation, not its beta.

Question 4

Treynor developed the first composite measure of portfolio performance by introducing the capital market line,which defines the relationship between the return of a portfolio over time and the return for the market portfolio.

Accepted Answer

The Treynor Ratio, developed by Jack Treynor, measures portfolio performance based on the excess return per unit of risk, using beta as the risk measure, not the capital market line. The Capital Market Line (CML) concept is associated with the Capital Asset Pricing Model (CAPM), which describes the risk-return trade-off for efficient portfolios.

Question 5

Treynor showed that rational,risk averse investors always prefer portfolio possibility lines that have

Accepted Answer

Rational, risk-averse investors prefer portfolio possibility lines with highly positive slopes because these lines represent a higher return per unit of risk, aligning with their preference for maximizing returns while minimizing risk.

Question 6

The information ratio permits only relative assessments of performance for different portfolios in a style class.

Accepted Answer

The information ratio is calculated as the excess return (return above a benchmark) divided by the tracking error (standard deviation of excess returns). Therefore, it compares the risk-adjusted performance of a portfolio to its benchmark. As a result, it allows only relative assessments of performance for different portfolios in a style class.

Question 7

Portfolio managers who anticipate an increase in interest rates should

Accepted Answer

When interest rates increase, bond prices tend to decrease. Portfolio managers should thus decrease the portfolio duration to reduce exposure to this risk. A decrease in the portfolio duration would mean reducing the average time each bond held in the portfolio has until its maturity or until its cash flows are received. By doing so, the portfolio’s sensitivity to changes in interest rates is also decreased.

Question 8

When applying the Jensen's alpha measure the alpha level and significance can vary greatly depending on the specification of the return-generating model.

Accepted Answer

Jensen's alpha is dependent on the specification of the return-generating model used in the analysis, so the alpha level and significance can vary.

Question 9

The measure of performance which divides the portfolio's risk premium by the portfolio's beta is the

Accepted Answer

The measure described is the Treynor measure, which measures risk-adjusted performance by dividing the portfolio's excess return over the risk-free rate by its beta.

Question 10

Under the performance attribution analysis method,the ____ measures the manager's decision to over- or underweight a particular market segment in terms of that segment's return performance relative to the overall return to the benchmark.

Accepted Answer

The allocation effect measures the impact of the manager's decision to over- or underweight a particular market segment relative to the benchmark. It measures the return performance of that segment compared to the overall benchmark return. The selection effect measures the performance of the securities selected within a market segment, while the distribution effect measures the performance of asset allocation decisions across different sectors or industries. The diversification effect measures the impact of diversification on the overall portfolio risk and return. The attribution effect refers to the overall process of assigning performance sources to particular decisions or factors.

Question 11

Which measure of portfolio performance allows analysts to determine the statistical significance of abnormal returns?

Accepted Answer

Jensen measure, also known as alpha, compares the actual return of a portfolio to its expected return based on its level of risk. This measure allows analysts to determine the statistical significance of abnormal returns, which are returns that differ from what would be expected given the level of risk.

Question 12

Selectivity measures how well a portfolio performed relative to a

Accepted Answer

Selectivity measures the performance of a portfolio compared to a naively selected portfolio with the same level of risk, assessing the manager's ability to select securities that outperform the market.

Question 13

Two desirable attributes of a portfolio manager's performance are the ability to derive above-average returns for a given risk class and the ability to time the market.

Accepted Answer

The answer of Two desirable attributes of a portfolio manager's...

Question 14

If the return increases as more global investments with low correlation are added to the market portfolio,the efficient frontier moves

Accepted Answer

Adding global investments with low correlation to the market portfolio increases diversification, which can lead to higher returns for a given level of risk. This shifts the efficient frontier up and to the left, indicating higher returns for the same or lower levels of risk.

Question 15

A portfolio performance measurement technique that decomposes the return of a manager's holdings to a predetermined benchmark's returns and separates the difference into an allocation and selection is called

Accepted Answer

This technique is known as performance attribution analysis, which breaks down the return of a portfolio into two parts: allocation and selection. Allocation measures how well the manager allocated assets among broad investment categories, while selection measures how well the manager selected individual securities within each category. Immunization analysis, tactical rankings, convexity utilization, and duration matching attrition are all unrelated portfolio measurement techniques.

Question 16

The market rewards investors for bearing total risk.

Accepted Answer

The market primarily rewards investors for bearing systematic risk (market risk), not total risk, which includes both systematic and unsystematic (specific) risk. Unsystematic risk can be diversified away.

Question 17

Sharpe's performance measure divides the portfolio's risk premium by the

Accepted Answer

The Sharpe ratio measures the risk-adjusted return of a portfolio by dividing the portfolio's excess return (risk premium) by the standard deviation of the portfolio's returns, which represents total risk.

Question 18

The major requirements of a portfolio manager include the following,except

Accepted Answer

Systematic risk cannot be eliminated through diversification; it is inherent to the market.

Question 19

Wagner and Tito suggested that a bond portfolio return differing from the return from the Lehman Brothers Index can be divided into four components.Which of the following is not included?

Accepted Answer

The answer of Wagner and Tito suggested that a bond...

Question 20

A portfolio manager should be evaluated many times and in a variety of market environments before a final judgment is reached regarding his/her strengths and weaknesses.

Accepted Answer

Evaluating a portfolio manager in different market conditions is necessary to get a comprehensive understanding of his/her performance and skillset. It can help to identify strengths and weaknesses and improve decision-making abilities. Therefore, it is important to evaluate a portfolio manager multiple times and under various market scenarios.

Quiz 25: Evaluation of Portfolio Performance