Deck 22: Performance Measurement and Presentation

Question 1

The expected utility of an investment is a _____ function of the expected return and a _____ function of the variance of those returns.

A) positive, positive
B) positive, negative
C) negative, positive
D) negative, negative

Answer 1

positive, negative

Question 2

The essence of performance evaluation is

A) converting all returns to annualized equivalents.
B) estimating the likelihood of loss.
C) calculating the geometric mean return.
D) associating a measure of risk with the portfolio return.

Answer 2

associating a measure of risk with the portfolio return.

Question 3

Over the past 4 years an investment returned 8%, 25%, 10%, and 15%. The compound annual return was

A) 14.3%
B) 14.5%
C) 15.1%
D) 15.5%

Answer 3

14.3%

Question 4

Over the past 4 years an investment returned 8%, -25%, 10%, and -15%. The compound annual return was

A) -9.1%
B) -7.3%
C) 3.5%
D) 5.6%

Question 5

The geometric mean is

A) always greater than the arithmetic mean.
B) Always greater than or equal to the arithmetic mean.
C) Always less than the arithmetic mean.
D) Always less than or equal to the arithmetic mean.

Question 6

The Sharpe measure related return to _____ risk.

A) market
B) total
C) unsystematic
D) business

Question 7

The denominator of the Treynor performance measure is

A) sigma.
B) delta.
C) the variance.
D) beta.

Question 8

The risk-adjusted performance of a single security should be measured using

A) the Sharpe measure.
B) the Treynor measure.
C) the harmonic mean return.
D) the arithmetic mean return.

Question 9

A security with a beta of zero should have an excess return of

A) zero.
B) the risk free rate.
C) the market return.
D) the long T-bond rate.

Question 10

A line from the risk free rate through the return associated with a beta of 1.0 is the

A) capital market line.
B) line of dominance.
C) security market line.
D) stochastic dominance line.

Question 11

Finance theory suggests that

A) few securities will plot above the security market line.
B) few securities will plot above the capital market line.
C) no securities will plot above the efficient frontier.
D) all of the above.

Question 12

CFA Institute performance presentation standards require

A) semi-annual valuation.
B) accrual accounting for fixed income securities.
C) the estimation of future dividends.
D) the exclusion of unrealized gains from calculations.

Question 13

The modified BAI return calculation method

A) approximates the internal rate of return.
B) excludes accrued income from the calculation.
C) equals the geometric mean return if the returns are computed monthly.
D) is only applicable to fixed income portfolios.

Question 14

CFA Institute recommended calculations include all of the following except

A) use of trade date accounting.
B) return calculation prior to management fees.
C) return calculation prior to taxes.
D) return calculations both with and without unrealized capital gains.

Question 15

Under CFA Institute performance presentation standards, all of the following are true except

A) all portfolios under management must be included in at least one composite.
B) portfolios no longer under management may be excluded from the historical record.
C) at least a ten year record of performance should be presented.
D) convertible securities should normally be treated as equity securities.

Question 16

An investment performance measure would best measure:

A) the total percentage return/year.
B) the total dollar return.
C) the total return relative to the risk assumed.
D) the risk assumed.

Question 17

The geometric average rate of return on three one-year returns of 9%, 4%, and 7% is:

A) 6.67%
B) 20%
C) 6.65%
D) 7%

Question 18

The Sharpe performance measure is:

A) the total return on the investment.
B) the premium earned above the risk-free rate divided by the standard deviation of return on the security.
C) the standard deviation of return on the security divided by the return on the security.
D) the return of the security divided by the standard deviation of return on the security.

Question 19

The Treynor performance measure should be used to measure _____ , while the Sharpe measure should be used _____ .

A) the performance of portfolios; to measure the performance of individual securities.
B) the performance of portfolios; to measure the performance of large portfolios.
C) the performance of single securities; to measure the performance of portfolios.
D) stock return; to measure bond returns.

Question 20

Sharp performance measures above the capital market line indicate:

A) performance better than expected.
B) performance under what was expected.
C) performance as expected.
D) all of the above are correct.

Question 21

Sharp performance measures for individual securities will generally be _____ the capital market line because of

A) right on; the measure of return per risk assumed.
B) randomly distributed above and below; systematic risk.
C) below; diversifiable risk.
D) below; market risk.

Question 22

CFA Institute bond returns calculations considers accrual accounting which means

A) bond default losses will accrue over future years.
B) bond interest income accrues daily interest to the investor.
C) bond discount is accrued over the term to maturity.
D) interest is only recognized when it is paid.

Question 23

Which of the following rate of return performance measures make(s) adjustments for principal additions and withdrawals for determining rate of return in a period?

A) total return
B) daily valuation method
C) Modified BAI Method
D) b and c above include consideration of cash in and out when determining rate of return.

Question 24

The CFA Institute total rate of return on a two-year bond investment with an original cost of $900, coupon of 6%, and a final maturity value of $1000?

A) 22%
B) 24%
C) 12%
D) 11%

Question 25

A stock was purchased for $20 five years ago and was just sold for $28.05, net. Assuming no dividends were paid what annual rate of return (geometric average) did the investor earn?

A) 40.25%
B) 10.06%
C) 7.00%
D) 1.40%

Question 26

The portfolio performance measure no longer widely used is the

A) Jensen measure
B) Sharpe measure
C) Treynor measure
D) none of the above since they are all widely used

Question 27

For a set of individual companies being plotted, the difference between the Capital Market Line graph and the Security Market Line graph is

A) the scale for rate of return
B) the measurement for risk
C) the intercept on the vertical axis
D) the measurement of return

Question 28

Proper performance evaluation should focus on the riskiness of an investment rather than its return.

Question 29

The geometric mean is always less than or equal to the arithmetic mean.

Question 30

A return relative equals one minus the return.

Question 31

The Sharpe performance measure relates return to total risk.

Question 32

The Treynor performance measure relates return to systematic risk.

Question 33

If Treasury bills yielded 3%, a security with a Jensen measure of 2% underperformed the market.

Question 34

An excess return will always be greater than the risk free rate.

Question 35

By finance theory, most securities will plot just above the capital market line.

Question 36

When considering the performance of a bond portfolio, CFA Institute standards require that interest income be calculated on an accrual basis.

Question 37

CFA Institute standards require the calculation of a time-weighted rate of return.

Question 38

CFA Institute standards recommend, in general, that investment results be presented before the deduction of management fees.

Question 39

If a firm advertises performance figures, CFA Institute standards require that all portfolios under management must be included in at least one composite measure of performance.

Question 40

CFA Institute standards require that convertible bonds be treated as an equity security rather than as a fixed income security in the preparation of composites.

Question 41

A portfolio manager's annual return of 20% on her portfolio, while the S&P 500 increased 12%, was a very good return for the year.

Question 42

The geometric average rate of return after four years of investment returns of 7%, 12%, 15%, and 8% is 13%.

Question 43

The total return performance measure does not consider time value.

Question 44

The Sharpe measure of single stock performance includes unsystematic risk.

Question 45

The Sharpe performance measure will tend to rank an undiversified portfolio lower than the Treynor performance measure.

Question 46

The Jensen performance measure utilizes the CAPM.

Question 47

Positive Jensen alpha is associated with better than average performance.

Question 48

The Capital Market Line measures the risk/return tradeoff.

Question 49

Sharp performance measures of a stock will be close to the Capital Market Line over time.

Question 50

The CFA Institute total return includes unrealized capital gains.

Question 51

Most performance return measures are on an after-tax basis.

Question 52

The daily valuation method considers cash flows and the timing of cash flows.