Question 1

Sharpe's performance measure divides the portfolio's risk premium by the
A) Standard deviation of the rate of return.
B) Variance of the rate of return.
C) Slope of the fund's characteristic line.
D) Beta.
E) Risk free rate.

Accepted Answer

Sharpe's performance measure, also known as the Sharpe ratio, calculates the excess return per unit of risk for a portfolio. It does this by dividing the portfolio's risk premium (the difference between the portfolio's return and the risk-free rate) by the standard deviation of the portfolio's returns, which measures the total risk of the portfolio.

Question 2

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.
A) Selection effect
B) Allocation effect
C) Distribution effect
D) Diversification effect
E) Attribution effect

Accepted Answer

The Selection effect measures the manager's ability to generate superior returns through the selection of securities within a market segment, compared to the benchmark's performance in that segment, reflecting the skill in picking winners.

Question 3

Portfolio managers who anticipate an increase in interest rates should
A) Act to keep the duration constant.
B) Decrease the portfolio duration.
C) Increase the portfolio duration.
D) Assume higher risk in the market.
E) Invest in junk bonds.

Accepted Answer

When interest rates increase, bond prices fall. This means that bonds with longer maturities (higher duration) will experience a greater decline in price than those with shorter maturities. Therefore, portfolio managers should decrease the portfolio duration to minimize the impact of interest rate increases on bond prices.

Question 4

Selectivity measures how well a portfolio performed relative to a
A) Market portfolio (S&P 400).
B) Portfolio of the same securities in the previous period.
C) Naively selected portfolio of equal risk.
D) Naively selected portfolio of equal return.
E) World market portfolio.

Accepted Answer

The answer of Selectivity measures how well a portfolio performed...

Question 5

Information ratio portfolio performance measures
A) Adjust portfolio risk to match benchmark risk.
B) Compare portfolio returns to expected returns under CAPM.
C) Evaluate portfolio performance on the basis of return per unit of risk.
D) Indicate historic average differential return per unit of historic variability of differential return.
E) None of the above.

Accepted Answer

The answer of Information ratio portfolio performance measures
A) Adjust portfolio...

Question 6

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 7

Relative return portfolio performance measures
A) Adjust portfolio risk to match benchmark risk.
B) Compare portfolio returns to expected returns under CAPM.
C) Evaluate portfolio performance on the basis of return per unit of risk.
D) Indicate historic average differential return per unit of historic variability of differential return.
E) None of the above.

Accepted Answer

Relative return portfolio performance measures evaluate portfolio performance on the basis of return per unit of risk. Option A refers to benchmark risk, which may not be relevant to evaluating portfolio performance. Option B involves comparing portfolio returns to expected returns under a specific model, which may not accurately reflect reality. Option D involves historic data, which may not be indicative of future performance. Therefore, option C is the best choice.

Question 8

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 9

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
A) Immunization analysis.
B) Performance attribution analysis.
C) Tactical rankings.
D) Convexity utilization.
E) Duration matching attrition.

Accepted Answer

The technique described is known as performance attribution analysis, which decomposes the return of a portfolio or manager's holdings to a predetermined benchmark's returns and then separates the difference into an allocation and selection. Immunization analysis, tactical rankings, convexity utilization, and duration matching attrition are unrelated terms and not applicable to this scenario.

Question 10

The major requirements of a portfolio manager include the following, except
A) Follow the client's policy statement.
B) Completely diversify the portfolio to eliminate all unsystematic risk..
C) The ability to derive above-average risk adjusted returns.
D) Completely diversify the portfolio to eliminate all systematic risk.
E) None of the above (that is, all are requirements of a portfolio manager)

Accepted Answer

While diversification is important, it is impossible to completely eliminate systematic risk (market risk) from a portfolio. A portfolio manager's goal is to manage and mitigate this risk while still achieving the client's goals and deriving above-average risk-adjusted returns. Therefore, D is the incorrect statement. A, C, and E are correct requirements of a portfolio manager.

Question 11

Which measure of portfolio performance allows analysts to determine the statistical significance of abnormal returns?
A) Sharpe measure
B) Jensen measure
C) Fama measure
D) Information Ratio
E) Treynor measure

Accepted Answer

The Jensen measure, also known as the "alpha" of a portfolio, measures the excess return of a portfolio over its expected return based on its level of systematic risk. It allows analysts to determine the statistical significance of abnormal returns by comparing the expected return based on the portfolio's level of risk to the actual return earned.

Question 12

The measure of performance which divides the portfolio's risk premium by the portfolio's beta is the
A) Sharpe measure.
B) Jensen measure.
C) Fama measure.
D) Information Ratio.
E) Treynor measure.

Accepted Answer

The measure described in the question is the Treynor measure, which is calculated by dividing the excess return (the risk premium) of a portfolio by its beta. The Treynor measure is used to evaluate the performance of a portfolio by adjusting for the level of risk taken to achieve the return. Therefore, the correct choice is (E).

Question 13

If the return increases as more global investments with low correlation are added to the market portfolio, the efficient frontier moves
A) Up and right.
B) Up and left.
C) Down and right.
D) Down and left.
E) Up only.

Accepted Answer

The answer of If the return increases as more global...

Question 14

Excess return portfolio performance measures
A) Adjust portfolio risk to match benchmark risk.
B) Compare portfolio returns to expected returns under CAPM.
C) Evaluate portfolio performance on the basis of return per unit of risk.
D) Indicate historic average differential return per unit of historic variability of differential return.
E) None of the above.

Accepted Answer

The answer of Excess return portfolio performance measures
A) Adjust portfolio...

Question 15

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.
A) Selection effect
B) Allocation effect
C) Distribution effect
D) Diversification effect
E) Attribution effect

Accepted Answer

The allocation effect measures the manager's decision to allocate more or less to a particular market segment in terms of that segment's return performance relative to the overall return to the benchmark. The selection effect measures the manager's decision to choose individual securities within a market segment in terms of their return performance relative to the market segment as a whole. The distribution effect and diversification effect are not commonly used in performance attribution analysis. The attribution effect is not a commonly used term in performance attribution analysis.

Question 16

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 Capital Market Line (CML) was introduced by William Sharpe as part of the Capital Asset Pricing Model (CAPM), not by Jack Treynor. Treynor developed the Treynor Ratio, a different measure of portfolio performance.

Question 17

For a poorly diversified portfolio the appropriate measure of portfolio performance would be
A) The Treynor measure because it evaluates portfolio performance on the basis of return and diversification.
B) The Sharpe measure because it evaluates portfolio performance on the basis of return and diversification.
C) The Treynor measure because it uses standard deviation as the risk measure.
D) The Sharpe measure because it uses beta as the risk measure.
E) None of the above.

Accepted Answer

The Sharpe ratio is the appropriate measure for a poorly diversified portfolio because it uses standard deviation as the risk measure, which captures both systematic and unsystematic risk.

Question 18

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

Accepted Answer

Peer group comparison is a commonly used method of evaluating portfolio managers. This involves comparing the performance of a portfolio manager's investment strategy against a group of their industry peers who manage similar types of funds. This helps to assess how well the manager has performed relative to their peers and whether they have added value to their clients' investments.

Question 19

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 multiple market environments allows for a more comprehensive understanding of their skills and abilities, and a more accurate assessment of their strengths and weaknesses.

Question 20

Treynor showed that rational, risk averse investors always prefer portfolio possibility lines that have
A) Zero slopes.
B) Slightly negative slopes.
C) Highly negative slopes.
D) Slightly positive slopes.
E) Highly positive slopes.

Accepted Answer

Treynor's model, which is related to the Capital Asset Pricing Model (CAPM), suggests that rational, risk-averse investors prefer portfolios with higher expected returns per unit of risk. This preference is represented by a portfolio possibility line (or the Security Market Line in CAPM) with a highly positive slope, indicating that investors are compensated with higher returns for taking on more risk.

Quiz 18: Evaluation of Portfolio Performance

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

Portfolio managers who anticipate an increase in interest rates should

Selectivity measures how well a portfolio performed relative to a

Information ratio portfolio performance measures

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.

Relative return portfolio performance measures

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

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

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

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

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

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

Excess return portfolio performance measures

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.

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.

For a poorly diversified portfolio the appropriate measure of portfolio performance would be

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

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.

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