Question 1

High Mountain Homes has an expected annual return of 16.1 percent and a standard deviation of 22.3 percent. What is the smallest expected loss over the next month given a probability of 2.5 percent?
A) -6.64 percent
B) -8.67 percent
C) -11.28 percent
D) -12.12 percent
E) -15.13 percent

Accepted Answer

Using the formula for expected loss with the normal distribution, we first find the z-score corresponding to a 2.5 percent probability: 
z = invNorm(0.025) = -1.96

We can then use this value to calculate the expected loss as: 
EL = E(R) + z * SD 
EL = 16.1% - 1.96 * 22.3% 
EL = -11.28%

Therefore, the answer is (C) -11.28 percent.

Question 2

Explain a key advantage and a key disadvantage of Jensen's alpha.

Accepted Answer

The answer of Explain a key advantage and a key...

Question 3

A stock has an annual standard deviation of 14.1 percent and an expected annual return of 11.5 percent. What is the smallest expected loss for the next 6 months given a probability of 2.5 percent?
A) -8.90 percent
B) -13.79 percent
C) -14.57 percent
D) -15.38 percent
E) -16.67 percent

Accepted Answer

Smallest expected loss = (0.115 × 0.5) − 1.96 × (0.141 × √0.5) = −13.79 percent

Question 4

A portfolio has a 3-year standard deviation of 20.20 percent. What is the one-year standard deviation?
A) 7.39 percent
B) 9.69 percent
C) 11.66 percent
D) 12.80 percent
E) 13.33 percent

Accepted Answer

The one-year standard deviation can be calculated by dividing the 3-year standard deviation by the square root of 3: 20.20% / √3 ≈ 11.66%.

Question 5

Mike's portfolio has a two-year expected return of 21.70 percent. What is the expected return for one year?
A) 10.85 percent
B) 12.50 percent
C) 13.33 percent
D) 14.22 percent
E) 15.34 percent

Accepted Answer

Annual return = 0.2170 / 2 = 10.85 percent

Question 6

A portfolio has an expected annual return of 15.7 percent and a standard deviation of 19.6 percent. What is the smallest expected loss over the next calendar quarter given a probability of 1 percent?
A) -15.11 percent
B) -16.23 percent
C) -16.49 percent
D) -18.08 percent
E) -18.87 percent

Accepted Answer

Smallest loss = (0.157 × 0.25) − 2.326 × (0.196 × √0.25) = −18.87 percent

Question 7

A conservative investor has a well-diversified portfolio but is still concerned about two things. First, he is concerned about the downside risk and secondly, he is concerned whether he is earning a sufficient rate of return to compensate for the total risk he is assuming. How could you quantify these concerns for this investor?

Accepted Answer

The answer of A conservative investor has a well-diversified portfolio...

Question 8

Your portfolio has a standard deviation of 11.7 percent. What is the two-year standard deviation?
A) 14.87 percent
B) 15.80 percent
C) 16.55 percent
D) 23.40 percent
E) 24.15 percent

Accepted Answer

Two-year standard deviation = .117 × √2 = 16.55 percent

Question 9

Explain the similarities and differences between the Sharpe and Treynor ratios. Also, explain the most appropriate application for each.

Accepted Answer

The answer of Explain the similarities and differences between the...

Question 10

The one-year standard deviation of your portfolio is 16.4 percent. What is the two-year standard deviation?
A) 17.47 percent
B) 19.23 percent
C) 23.19 percent
D) 25.41 percent
E) 27.20 percent

Accepted Answer

The two-year standard deviation can be calculated using the following formula:
Two-year standard deviation = one-year standard deviation x √2 
= 16.4% x √2 
= 23.19% 
Therefore, the answer is choice C - 23.19 percent.

Question 11

Trailer Co. stock has an expected return of 11.8 percent and a standard deviation of 11.8 percent. What is the smallest expected loss over the next month given a probability of 5 percent?
A) -4.62 percent
B) -6.09 percent
C) -7.27 percent
D) -11.49 percent
E) -13.77 percent

Accepted Answer

The smallest expected loss over the next month given a probability of 5 percent is -4.62 percent. This is because the expected return is 11.8 percent and the standard deviation is 11.8 percent, so the z-score for a probability of 5 percent is -1.645. This means that the expected loss is 11.8 percent - (1.645 * 11.8 percent) = -4.62 percent.

Quiz 13: Performance Evaluation and Risk Management

High Mountain Homes has an expected annual return of 16.1 percent and a standard deviation of 22.3 percent. What is the smallest expected loss over the next month given a probability of 2.5 percent?

Explain a key advantage and a key disadvantage of Jensen's alpha.

A stock has an annual standard deviation of 14.1 percent and an expected annual return of 11.5 percent. What is the smallest expected loss for the next 6 months given a probability of 2.5 percent?

A portfolio has a 3-year standard deviation of 20.20 percent. What is the one-year standard deviation?

Mike's portfolio has a two-year expected return of 21.70 percent. What is the expected return for one year?

A portfolio has an expected annual return of 15.7 percent and a standard deviation of 19.6 percent. What is the smallest expected loss over the next calendar quarter given a probability of 1 percent?

Your portfolio has a standard deviation of 11.7 percent. What is the two-year standard deviation?

Explain the similarities and differences between the Sharpe and Treynor ratios. Also, explain the most appropriate application for each.

The one-year standard deviation of your portfolio is 16.4 percent. What is the two-year standard deviation?

Trailer Co. stock has an expected return of 11.8 percent and a standard deviation of 11.8 percent. What is the smallest expected loss over the next month given a probability of 5 percent?