Deck 22: Evaluation of Investment Performance
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Deck 22: Evaluation of Investment Performance
1
Assume Portfolio A and Portfolio B are well-diversified;however,Portfolio A has a higher standard deviation than Portfolio B.Based on this information,the Sharpe ratio will give Portfolio A:
A)the higher rank,and the Treynor ratio will give Portfolio B the higher rank.
B)the lower rank,and the Treynor ratio will give Portfolio B the lower rank.
C)the same rank as the rank assigned by the Treynor ratio.
D)a rank that varies directly based on the overall market risk.
A)the higher rank,and the Treynor ratio will give Portfolio B the higher rank.
B)the lower rank,and the Treynor ratio will give Portfolio B the lower rank.
C)the same rank as the rank assigned by the Treynor ratio.
D)a rank that varies directly based on the overall market risk.
C
2
If we are to assess performance carefully,we must do so on what kind of basis?
A)Quarterly
B)Annual
C)Attribution-weighted
D)Risk-adjusted
A)Quarterly
B)Annual
C)Attribution-weighted
D)Risk-adjusted
D
3
Superior portfolio performance can result from:
A)the ability to select undervalued securities,only.
B)the ability to time market turns,only.
C)superior selectivity or timing performance.
D)neither superior selectivity nor timing because the market is too efficient.
A)the ability to select undervalued securities,only.
B)the ability to time market turns,only.
C)superior selectivity or timing performance.
D)neither superior selectivity nor timing because the market is too efficient.
C
4
Relative to the Sharpe ratio,the Sortino ratio will make a portfolio's performance look more favorable if the portfolio has experienced:
A)fewer extreme negative returns relative to extreme positive returns.
B)fewer extreme positive returns relative to extreme negative returns.
C)an equal number of extreme positive and extreme negative returns.
D)virtually no extreme negative or extreme positive returns.
A)fewer extreme negative returns relative to extreme positive returns.
B)fewer extreme positive returns relative to extreme negative returns.
C)an equal number of extreme positive and extreme negative returns.
D)virtually no extreme negative or extreme positive returns.
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5
The information in the following table is to be used to answer questions .
* Significant at the 5 percent level
-Which fund is least well-diversified?
A)Fund 1
B)Fund 2
C)Fund 3
D)Fund 4
* Significant at the 5 percent level
-Which fund is least well-diversified?
A)Fund 1
B)Fund 2
C)Fund 3
D)Fund 4
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6
What is the major question when evaluating the performance of an individual's portfolio?
A)Does the portfolio align with the investor's characteristics?
B)Does the expected return of the portfolio meet the needs of the investor?
C)Is the return on the portfolio adequate to compensate for its risk?
D)Is the portfolio's risk in line with the personal characteristics of the investor?
A)Does the portfolio align with the investor's characteristics?
B)Does the expected return of the portfolio meet the needs of the investor?
C)Is the return on the portfolio adequate to compensate for its risk?
D)Is the portfolio's risk in line with the personal characteristics of the investor?
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7
Which of the following represents the alternative portfolio that reflects the objectives of the portfolio under management?
A)Market average index
B)Efficient portfolio
C)Benchmark portfolio
D)Performance standard
A)Market average index
B)Efficient portfolio
C)Benchmark portfolio
D)Performance standard
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8
Which of the following indices is most appropriate as a benchmark portfolio for a large-cap mutual fund?
A)Wilshire 5000
B)S&P 500
C)Dow Jones Industrial Average
D)Russell 2000
A)Wilshire 5000
B)S&P 500
C)Dow Jones Industrial Average
D)Russell 2000
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9
The information ratio is calculated as the ratio of:
A)mean active return to tracking risk.
B)alpha to beta.
C)excess return to portfolio standard deviation.
D)portfolio excess return to tracking risk.
A)mean active return to tracking risk.
B)alpha to beta.
C)excess return to portfolio standard deviation.
D)portfolio excess return to tracking risk.
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10
The information in the following table is to be used to answer questions .
* Significant at the 5 percent level
-Which fund has the most total risk?
A)Fund 1
B)Fund 2
C)Fund 3
D)Fund 4
* Significant at the 5 percent level
-Which fund has the most total risk?
A)Fund 1
B)Fund 2
C)Fund 3
D)Fund 4
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11
Which of the following statements about the Sharpe ratio and Treynor ratio is most accurate? The Sharpe ratio is based on:
A)total risk,whereas the Treynor ratio is based on systematic risk.
B)systematic risk,whereas the Treynor ratio is based on total risk.
C)unsystematic risk,whereas the Treynor ratio is based on systematic risk.
D)total risk,whereas the Treynor ratio is based on unsystematic risk.
A)total risk,whereas the Treynor ratio is based on systematic risk.
B)systematic risk,whereas the Treynor ratio is based on total risk.
C)unsystematic risk,whereas the Treynor ratio is based on systematic risk.
D)total risk,whereas the Treynor ratio is based on unsystematic risk.
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12
The Global Investment Performance Standards (GIPS®)were created by:
A)the CFA Institute.
B)the Securities and Exchange Commission (SEC).
C)Morningstar.
D)the Federal Reserve.
A)the CFA Institute.
B)the Securities and Exchange Commission (SEC).
C)Morningstar.
D)the Federal Reserve.
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13
According to Jensen's differential return measure,what is alpha?
A)The intercept of the SML line
B)The intercept of the CML line
C)A measure of the superior or inferior performance on a portfolio
D)The actual excess return on a portfolio during one period
A)The intercept of the SML line
B)The intercept of the CML line
C)A measure of the superior or inferior performance on a portfolio
D)The actual excess return on a portfolio during one period
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14
Which of the following measures indicates the percentage of the variation in a portfolio's returns that is explained by variation in the market's returns?
A)Standard deviation
B)Coefficient of determination
C)Beta
D)Alpha
A)Standard deviation
B)Coefficient of determination
C)Beta
D)Alpha
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15
Which of the following measures uses the standard deviation and evaluates portfolio performance on the basis of both return and diversification.
A)Jensen's alpha
B)Treynor measure
C)M2
D)Sharpe ratio
A)Jensen's alpha
B)Treynor measure
C)M2
D)Sharpe ratio
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16
The reward-to-variability ratio (Sharpe ratio)measures:
A)return above the risk-free rate.
B)excess return per unit of total risk.
C)total risk per unit of excess return.
D)return above the risk-free rate relative to beta.
A)return above the risk-free rate.
B)excess return per unit of total risk.
C)total risk per unit of excess return.
D)return above the risk-free rate relative to beta.
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17
A portfolio with a beta of 0.8 earned a return of 13 percent when the risk-free rate was 6 percent and the market returned 9 percent.The portfolio's Treynor measure is closest to:
A)1.8.
B)3.8.
C)5.0.
D)8.8.
A)1.8.
B)3.8.
C)5.0.
D)8.8.
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18
The information in the following table is to be used to answer questions .
* Significant at the 5 percent level
-Based on Jensen's performance measure,which fund significantly outperformed?
A)Fund 1
B)Fund 2
C)Fund 3
D)Fund 4
* Significant at the 5 percent level
-Based on Jensen's performance measure,which fund significantly outperformed?
A)Fund 1
B)Fund 2
C)Fund 3
D)Fund 4
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19
The information in the following table is to be used to answer questions .
* Significant at the 5 percent level
-Which fund's returns are best explained by the market's returns?
A)Fund 1
B)Fund 2
C)Fund 3
D)Fund 4
* Significant at the 5 percent level
-Which fund's returns are best explained by the market's returns?
A)Fund 1
B)Fund 2
C)Fund 3
D)Fund 4
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20
The information in the following table is to be used to answer questions .
* Significant at the 5 percent level
-Which of the funds has the most market risk?
A)Fund 1
B)Fund 2
C)Fund 3
D)Fund 4
* Significant at the 5 percent level
-Which of the funds has the most market risk?
A)Fund 1
B)Fund 2
C)Fund 3
D)Fund 4
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21
Which of the following statements about return calculation is most accurate?
A)Time-weighted returns are always higher than money-weighted returns.
B)Money-weighted returns are always higher than time-weighted returns.
C)The GIPS require that time-weighted returns are reported for most asset classes.
D)The time-weighted return is equivalent to the IRR.
A)Time-weighted returns are always higher than money-weighted returns.
B)Money-weighted returns are always higher than time-weighted returns.
C)The GIPS require that time-weighted returns are reported for most asset classes.
D)The time-weighted return is equivalent to the IRR.
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22
One approach to style analysis which uses the features of the stocks in the portfolio is known as:
A)returns-based style analysis.
B)asset allocation style analysis.
C)holdings-based style analysis.
D)mix-based style analysis.
A)returns-based style analysis.
B)asset allocation style analysis.
C)holdings-based style analysis.
D)mix-based style analysis.
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23
The use of the Treynor measure implies that total risk is the proper measure of risk in performance evaluation.
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24
Based on Jensen's measure,superior portfolio performance is exhibited by a:
A)statistically significant positive alpha.
B)statistically significant negative alpha.
C)zero alpha.
D)low positive alpha.
A)statistically significant positive alpha.
B)statistically significant negative alpha.
C)zero alpha.
D)low positive alpha.
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25
Total risk of a portfolio is measured by the beta coefficient.
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26
Performance attribution separates return performance into the following two sources:
A)security analysis and portfolio management.
B)money market and capital market securities.
C)traditional assets and alternative assets.
D)asset allocation and security selection.
A)security analysis and portfolio management.
B)money market and capital market securities.
C)traditional assets and alternative assets.
D)asset allocation and security selection.
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27
To claim GIPS compliance in reporting portfolio performance,the standards require:
A)a 5-year performance record,or since inception if the fund is less than 5-years old.
B)that the majority of the firm's funds meet GIPS standards.
C)that the majority of the firm's portfolios are included in the performance record.
D)a firm build toward a minimum record of 20 years of reported performance.
A)a 5-year performance record,or since inception if the fund is less than 5-years old.
B)that the majority of the firm's funds meet GIPS standards.
C)that the majority of the firm's portfolios are included in the performance record.
D)a firm build toward a minimum record of 20 years of reported performance.
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28
Which of the following is the largest recognized problem with style analysis?
A)Funds frequently do not maintain style consistency over time.
B)Comparing style across funds is nearly impossible.
C)It is very difficult to determine the style a fund is following.
D)There are too many alternative means to calculate a fund's style.
A)Funds frequently do not maintain style consistency over time.
B)Comparing style across funds is nearly impossible.
C)It is very difficult to determine the style a fund is following.
D)There are too many alternative means to calculate a fund's style.
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29
When evaluating the performance of a mutual fund holding several S&P 500 stocks,one should always use the S&P 500 as the benchmark.
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30
Which organization has issued minimum standards for the reporting of investment performance?
A)FINRA
B)Securities and Exchange Commission (SEC)
C)Association for Security Analysts and Portfolio Managers
D)Chartered Financial Analyst Institute
A)FINRA
B)Securities and Exchange Commission (SEC)
C)Association for Security Analysts and Portfolio Managers
D)Chartered Financial Analyst Institute
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31
Which measure calculates performance relative to a benchmark portfolio?
A)Sortino ratio
B)M2
C)Information ratio
D)Sharpe ratio
A)Sortino ratio
B)M2
C)Information ratio
D)Sharpe ratio
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32
Treynor's measure is a ratio of excess return to systematic risk.
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33
Carl invested $100,000 in a fund,which earned 8% over the next year.At the end of the year,he invested an additional $50,000 and the fund earned 18% over the next year.Carl withdrew no money from the fund.Which of the following statements about time-weighted return (TWR)and money-weighted return (MWR)is most accurate?
A)TWR is greater than MWR,and MWR is the more appropriate measure for Carl.
B)MWR is greater than TWR,and MWR is the more appropriate measure for Carl.
C)TWR is greater than MWR,and TWR is the more appropriate measure for Carl.
D)MWR is greater than TWR,and TWR is the more appropriate measure for Carl.
A)TWR is greater than MWR,and MWR is the more appropriate measure for Carl.
B)MWR is greater than TWR,and MWR is the more appropriate measure for Carl.
C)TWR is greater than MWR,and TWR is the more appropriate measure for Carl.
D)MWR is greater than TWR,and TWR is the more appropriate measure for Carl.
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34
Standard deviation,beta,and coefficient of determination are readily available for mutual funds from sources like Morningstar.
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35
The money-weighted rate of return is equivalent to the internal rate of return.
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36
The higher the Sharpe ratio,the better the risk-adjusted portfolio performance.
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37
Sharpe's measure is a ratio of excess return to total risk.
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38
The time-weighted rate of return is affected by any cash flows to the portfolio.
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39
Which of the following is true regarding M2?It produces a measure of portfolio performance that:
A)is adjusted for systematic risk.
B)can be compared directly to the risk-free rate.
C)can be compared directly with the market return.
D)indicates what would be possible if the portfolio was fully leveraged.
A)is adjusted for systematic risk.
B)can be compared directly to the risk-free rate.
C)can be compared directly with the market return.
D)indicates what would be possible if the portfolio was fully leveraged.
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40
Which of the following statements about portfolio return calculation is most accurate? Time-weighted returns are best for measuring the returns of a:
A)fund manager,whereas money-weighted returns are best for a portfolio owner.
B)portfolio owner,whereas money-weighted returns are best for a fund manager.
C)fund manager,whereas money-weighted returns are no longer used in practice.
D)portfolio owner,whereas money-weighted returns are generally used in practice.
A)fund manager,whereas money-weighted returns are best for a portfolio owner.
B)portfolio owner,whereas money-weighted returns are best for a fund manager.
C)fund manager,whereas money-weighted returns are no longer used in practice.
D)portfolio owner,whereas money-weighted returns are generally used in practice.
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41
Discuss how constraints on portfolio managers affect the portfolio results.
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42
Investors who have all their assets in one portfolio of securities should rely on the Sharpe measure rather than the Treynor measure.
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43
Performance attribution seeks to determine the detailed investment style adopted by a money manager.
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44
Jensen's measure of performance is based on the CAPM.
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45
Time-weighted,as opposed to money-weighted,return captures the rate of return actually earned by the fund manager.
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46
Jensen's alpha is a risk-adjusted performance measure.
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47
The purpose of performance attribution is to assess the risk of a portfolio.
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48
GIPS requires compliant history for at least 10 years,or since inception,if less than 10 years.
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49
Explain the characteristic line in excess return form for the Jensen alpha measure.
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50
What are some of the problems associated with using risk-adjusted portfolio performance measures?
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51
How is regression analysis used to measure portfolio diversification?
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52
What is the major difference between the Sharpe and Treynor measures?
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53
What are the appropriate uses of the Sharpe and the Treynor performance measures?
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54
A retired couple's assets consist of a $100,000 house,a $400,000 securities portfolio,a $15,000 car,and personal effects.Would they be more concerned with the Sharpe measure or the Treynor measure for the portfolio?
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55
GIPS requirements include: uniformity in certain performance calculations and disclosures;inclusion of all actual fee-paying discretionary portfolios in composites with similar objectives;compliant history for at least 5 years,or since inception if less than 5 years.
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56
What is performance attribution?
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57
GIPS was created to obtain global acceptance of a standard for fair presentation.
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58
Modigliani-squared is a return adjusted for volatility that allows returns between portfolios to be compared.
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59
Sharpe's ratio measures the slope of the line between RF and the portfolio being evaluated.If the line is plotted between RF and a market index,where would superior portfolios lie?Inferior portfolios?
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60
The coefficient of determination,also known as R-squared,is used to denote the degree of diversification.
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