Question 1

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.
E) None of the options are correct.

Accepted Answer

The Treynor Index is a measure of average portfolio returns (in excess of the risk-free return) per unit of systematic risk (as measured by beta).

Question 2

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 Index is a measure of average portfolio returns (in excess of the risk-free return) per unit of systematic risk (as measured by beta).

Question 3

__________ 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

Michael Jensen, William Sharpe, and Jack Treynor developed popular models for mutual fund performance evaluation.

Question 4

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
E) I, III, and V

Accepted Answer

Hedge funds should only be added to an already well-diversified portfolio, pose performance evaluation issues due to nonlinear factor exposures, and have down-market betas that are typically larger than up-market betas.

Question 5

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.
E) match the performance of the S&P 500 Index on both raw and risk-adjusted return measures.

Accepted Answer

Most mutual funds do not consistently, over time, outperform the S&P 500 Index on the basis of either raw or risk-adjusted return measures.

Question 6

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.
E) None of the options are correct.

Accepted Answer

The Treynor Index is a measure of average portfolio returns (in excess of the risk-free return) per unit of systematic risk (as measured by beta).

Question 7

Suppose two portfolios have the same average return and the same standard deviation of returns, but portfolio A has a higher beta than portfolio B. According to the Sharpe measure, the performance of portfolio A
A) is better than the performance of portfolio B.
B) is the same as the performance of portfolio B.
C) is poorer than the performance of portfolio B.
D) cannot be measured as there are no data on the alpha of the portfolio.
E) None of the options are correct.

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 8

Suppose two portfolios have the same average return and the same standard deviation of returns, but portfolio A has a lower beta than portfolio B. According to the Treynor measure, the performance of portfolio A
A) is better than the performance of portfolio B.
B) is the same as the performance of portfolio B.
C) is poorer than the performance of portfolio B.
D) cannot be measured as there are no data on the alpha of the portfolio.
E) None of the options are correct.

Accepted Answer

The Treynor Index is a measure of average portfolio returns (in excess of the risk-free return) per unit of systematic risk (as measured by beta).

Question 9

Suppose two portfolios have the same average return and the same standard deviation of returns, but portfolio A has a higher beta than portfolio B. According to the Treynor measure, the performance of portfolio A
A) is better than the performance of portfolio B.
B) is the same as the performance of portfolio B.
C) is poorer than the performance of portfolio B.
D) cannot be measured as there are no data on the alpha of the portfolio.
E) None of the options are correct.

Accepted Answer

The Treynor Index is a measure of average portfolio returns (in excess of the risk-free return) per unit of systematic risk (as measured by beta).

Question 10

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 Index is a measure of average portfolio returns (in excess of the risk-free return) per unit of unit of systematic risk (as measured by beta).

Question 11

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
E) modest; modest

Accepted Answer

Mutual funds show almost no evidence of serial correlation and hedge funds show substantial evidence of serial correlation.

Question 12

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 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 13

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 14

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
E) I, II, III, IV, and V

Accepted Answer

II is incorrect- Morningstar uses up to 5 stars to indicate the quality of performance. V is incorrect because the RAR method produces results that are similar to the Sharpe ratio but not identical.

Question 15

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

1% = 14% [4% + 1.2(x 4%)]; x = 11.5%.

Question 16

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
E) More information is necessary to answer this question.

Accepted Answer

In the dollar-weighted return, the stock's performance in the second year, when 200 shares are held, has a greater influence on the overall dollar-weighted return. The time-weighted return ignores the number of shares held.

Question 17

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.
E) None of the options are correct.

Accepted Answer

A mutual fund manager is evaluated against the performance of managers of funds of similar risk characteristics.

Question 18

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

A mutual fund manager is evaluated against the performance of managers of funds of similar risk characteristics.

Question 19

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
E) did not change

Accepted Answer

Portfolio betas should have a large value if the market is expected to perform well and a small value if the market is not expected to perform well; thus, these results reflect the poor timing ability of mutual fund managers.

Question 20

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 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).

Quiz 24: Portfolio Performance Evaluation

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

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

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

Most professionally managed equity funds generally

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 portfolio A has a higher beta than portfolio B. According to the Sharpe measure, the performance of portfolio A

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

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

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

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 Buckeye Fund has a higher beta than Gator Fund. According to the Sharpe 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 Sharpe measure, the performance of Buckeye Fund

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

The comparison universe is

The comparison universe is not

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

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