Question 1

Which of the following is not one of the major factors to consider when comparing different portfolios?&#10;A) differential time periods&#10;B) differential investor preferences&#10;C) differential risk levels&#10;D) appropriate benchmarks

Accepted Answer

Differential investor preferences are not a factor in comparing the performance of different portfolios. The comparison typically focuses on time periods, risk levels, and benchmarks to ensure an objective analysis. Investor preferences are subjective and vary widely, making them unsuitable for a direct portfolio performance comparison.

Question 2

Which of the following statements is not true concerning portfolios?&#10;A) Diversification can reduce portfolio risk.&#10;B) There do not exist any precise universally agreed upon method of portfolio evaluation.&#10;C) If a portfolio contained unsystematic risk, it is important to know if adequate compensation was earned.&#10;D) The track record of a mutual fund portfolio is a guarantee of future returns.

Accepted Answer

The track record of a mutual fund portfolio is not a guarantee of future returns. This is because past performance does not necessarily predict future results due to the changing nature of markets and economic conditions.

Question 3

Which one of the following statements is true?
Notation: Sharpe - Sharpe's reward-to-variability measure (RVAR)
Treynor - Treynor's reward-to-volatility measure (RVOL)

A) Treynor is based on total risk while Sharpe is based on systematic risk.
B) Sharpe is based on total risk while Treynor is based on systematic risk.
C) Sharpe is based on unsystematic risk while Treynor is based on systematic risk.
D) Treynor is based on total risk while Sharpe is based on unsystematic risk.

Sharpe is based on total risk while Treynor is based on systematic risk.

Accepted Answer

Sharpe's reward-to-variability measure (RVAR) is based on total risk, as it uses the standard deviation of portfolio returns as a measure of risk. Treynor's reward-to-volatility measure (RVOL), on the other hand, is based on systematic risk, as it uses beta, which measures the sensitivity of the portfolio's returns to the market's returns, thus focusing on the risk that cannot be diversified away.

Question 4

According to Jensen's differential return measure, which interpretation of alpha is incorrect?&#10;A) If alpha is significantly positive, this is evidence of superior performance.&#10;B) If alpha is significantly negative, this is evidence of interior performance.&#10;C) If alpha is insignificantly different from zero, this is evidence that the portfolio manager did not match the market on a risk-adjusted basis.&#10;D) All the above are correct interpretations of alpha.

Accepted Answer

If alpha is insignificantly different from zero, it indicates that the portfolio manager's performance is similar to the market on a risk-adjusted basis, not that they failed to match the market.

Question 5

The alpha for a particular fund for a particular period can be:&#10;A) zero or positive, but not negative.&#10;B) zero or negative, but not positive.&#10;C) positive or negative, but not zero.&#10;D) positive, zero, or negative.

Accepted Answer

Alpha is a measure of the performance of an investment relative to a benchmark index. It can be positive (outperforming the benchmark), negative (underperforming the benchmark), or zero (matching the performance of the benchmark).

Question 6

Superior portfolio performance can result:&#10;A) from only the selection of undervalued securities.&#10;B) from only the superior ability to time market turns.&#10;C) from either the superior selectivity or timing performance.&#10;D) neither from superior selection nor timing as the market is too efficient.

Accepted Answer

Superior portfolio performance can result from either the ability to select undervalued securities (superior selectivity) or the ability to accurately time market turns (timing performance). Both skills can lead to outperforming the market average, depending on the effectiveness of the strategy and market conditions.

Question 7

Select the correct statement about Sharpe's reward-to-variability ratio (RVAR).&#10;A) RVAR is an absolute measure of performance.&#10;B) RVAR measures the slope of the line from RF to the portfolio being evaluated.&#10;C) The closer the RVAR to 0.0, the better is the performance.&#10;D) RVAR does not take into account how well diversified a portfolio was.

Accepted Answer

RVAR, also known as the Sharpe Ratio, measures the excess return per unit of risk of a portfolio. It is calculated as the slope of the line from the risk-free rate (RF) to the portfolio point on a risk-return graph, indicating how much excess return is received for the extra volatility of holding a riskier asset over a risk-free asset.

Question 8

The following information is to be used to answer the following questions
Over the 11-year period,1997-2007, the Market Index (MI) had an average annual return of 13.5 percent and a standard deviation of 9 percent. The average annual return on Treasury bills was 6.75 percent. For four open-end mutual funds, some summary data are shown:

-The mutual fund with the greatest diversification was:

A) Fund 1.
B) Fund 2.
C) Fund 3.
D) Fund 4.

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Accepted Answer

Sharpe's RVAR (Relative Value-at-Risk) for the Market Index typically indicates the risk-adjusted return compared to a risk-free asset. A value between zero and 1.0 suggests a positive but modest risk-adjusted return above the risk-free rate, which is common for many market indices.

Question 9

The following information is to be used to answer the following questions
Over the 11-year period,1997-2007, the Market Index (MI) had an average annual return of 13.5 percent and a standard deviation of 9 percent. The average annual return on Treasury bills was 6.75 percent. For four open-end mutual funds, some summary data are shown:

-Sharpe's RVAR for the Market Index was: