Deck 13: Performance Evaluation and Risk Management

Question 1

The assessment of the returns generated by a money manager relative to the level of risk taken is known as:

A) market testing.
B) value-at-risk.
C) performance evaluation.
D) minimum variance evaluation.
E) risk management.

Answer 1

C

Question 2

Which of the following performance measures analyzes the portfolio's risk premium?
I) Treynor ratio
II) Sharpe ratio
III) Jensen's alpha

A) II only
B) I and II only
C) II and III only
D) I only
E) I, II, and III

Answer 2

B

Question 3

__________ deals with the money manager's control over investment risk, particularly with the potential short-term losses.

A) Investment risk management
B) Market simulation
C) Value-at-risk
D) Back testing
E) Performance evaluation

Answer 3

A

Question 4

Raw returns are not particularly useful when making investment decisions because they

A) Are the expected returns only
B) Ignore inflation
C) Are adjusted for total risk rather than just systematic risk
D) Are based on a tentative beta
E) Ignore risk

Question 5

A negative Sharpe ratio indicates

A) a contrarian management style.
B) a portfolio which failed to beat the performance of the risk free asset.
C) a portfolio which is well managed.
D) the portfolio's raw return was great than its standard deviation
E) None of the above.

Question 6

The passive portfolio management involves

A) Programming
B) Market timing
C) Tactical asset allocation
D) A sector rotation technique
E) A buy and hold strategy

Question 7

The best performance measures of a market index fund would be

A) The Jensen's alpha
B) The TSX Composite index
C) The Treynor ratio
D) The Sharpe ratio
E) The M2 measure

Question 8

___________ measures investment performance as the ratio of the portfolio risk premium over the portfolio beta. This approach gives the amount of risk premium per unit of beta.

A) The Treynor ratio
B) The raw return
C) Jensen's alpha
D) The Sharpe ratio
E) The Jensen-Treynor alpha

Question 9

Jensen's alpha measures a security's raw return against the

A) Sharpe-adjusted return
B) Market return
C) CAPM return
D) Real return
E) Treynor-adjusted return

Question 10

The Sharpe Ratio is considered to be a good measure for well diversified portfolios because:

A) The most of the total risk in the portfolio is systemic risk
B) The beta estimate is unambiguous.
C) It used by mutual fund managers.
D) Unsystemic risk is of little worry in correctly diversified portfolios.
E) Well diversified portfolios have a high R-Squared correlation.

Question 11

The risk premium of a portfolio divided by the portfolio's standard deviation is called

A) The Treynor ratio
B) The raw return
C) Jensen's alpha
D) The Sharpe ratio
E) The Jensen-Treynor alpha

Question 12

_______ gives the excess return of a hypothetical portfolio over the market portfolio while they carry the same risk.

A) The Treynor ratio
B) The Tobin's q
C) The Jensen's alpha
D) The Sharpe ratio
E) The M² measure

Question 13

_________ is defined as the return of an investment without any adjustment for risk or comparison to a benchmark.

A) The Treynor ratio
B) The raw return
C) Jensen's alpha
D) The Sharpe ratio
E) The Jensen-Treynor alpha

Question 14

The Sharpe ratio is best utilized for evaluating

A) Bonds
B) Low-risk stocks
C) High-risk stocks
D) Government securities
E) Well-diversified portfolios

Question 15

Which of the following performance measures is the least useful measure of performance?

A) Treynor ratio.
B) Raw return.
C) Jensen-Treynor alpha.
D) Jensen's alpha.
E) Sharpe ratio.

Question 16

The statistical model for assessing probabilities based on a mean and standard deviation is called the ___________ distribution.

A) t-
B) Chi squared
C) F
D) Normal
E) Binomial

Question 17

__________ is an attempt by the manager to outperform, on a risk-adjusted basis, a benchmark portfolio.

A) Active portfolio management
B) Passive portfolio management
C) Hybrid portfolio management
D) Structured portfolio management
E) Cyclical portfolio management

Question 18

_________ assesses risk by stating the probability of a loss a portfolio that might be incurred within a stated time period given a specified probability.

A) Investment risk management
B) Market simulation
C) Value-at-risk
D) Back testing
E) Performance evaluation

Question 19

A __________ portfolio has the highest reward-to-risk ratio over any possible combination of the investment opportunity set.

A) Jensen-optimal
B) Sharpe-optimal
C) Treynor-optimal
D) Credit-optimal
E) Default-optimal

Question 20

Which one of the following is computed by dividing a portfolio's risk premium by the portfolio beta?

A) The Treynor ratio
B) The raw return
C) Jensen's alpha
D) The Sharpe ratio
E) The Jensen-Treynor alpha

Question 21

An asset with a positive Treynor ratio will plot __________ the security market line.

A) above
B) below
C) on
D) on or below
E) on or above

Question 22

In an efficient market, which of the following performance measures should be zero for all assets?
I) Treynor ratio
II) Sharpe ratio
III) Jensen's alpha

A) III only
B) I and III only
C) II and III only
D) I only
E) I, II, and III

Question 23

The Sharpe ratio measures return relative to

A) Total risk
B) Diversifiable risk
C) The market return
D) The risk-free return
E) Systematic risk

Question 24

Which of the following performance measures is best used to analyze a portfolio for possible inclusion in a master portfolio?
I) Treynor ratio
II) Sharpe ratio
III) Jensen's alpha

A) III only
B) I and III only
C) II and III only
D) I only
E) I, II, and III

Question 25

In the normal distribution, the z-statistic value for a one tailed probability of 95 percent is __________.

A) 1.215
B) 1.645
C) 1.960
D) 2.326
E) 2.415

Question 26

An asset with a Treynor ratio greater than the Treynor ratio of the market will have a:

A) positive Jensen's alpha.
B) negative Jensen's alpha.
C) Sharpe ratio greater than the Sharpe ratio of the market.
D) Sharpe ratio les than the Sharpe ratio of the market.
E) Insufficient information.

Question 27

The Sharpe-optimal fund allocation line has

A) a slope of -1.
B) a slope of +1.
C) the highest slope possible given the portfolio opportunity set.
D) a slope of zero.
E) none of the above.

Question 28

The Treynor ratio measures the _________ per unit of ___________ risk.

A) Raw return; total
B) Raw return; systematic
C) Portfolio excess return; systematic
D) Portfolio excess return; total
E) Portfolio excess return; unique

Question 29

The Jensen-Treynor alpha is defined as:

A) beta/Jensen's alpha
B) Jensen's alpha/standard deviation
C) standard deviation/Jensen's alpha
D) Jensen's alpha/beta
E) beta $\times$ Jensen's alpha

Question 30

Which of the following performance measures does not depend upon the accuracy of the beta?

A) Treynor ratio.
B) Sharpe ratio.
C) Jensen-Treynor alpha.
D) Jensen's alpha.
E) None of the above.

Question 31

You want to create a two-asset portfolio. To have the best portfolio possible, you should select for the _________ portfolio.

A) Highest beta
B) Sharpe-optimal
C) Highest return
D) Sharpe-minimal
E) Market equivalent

Question 32

An asset with a negative Jensen's alpha will plot __________ the security market line.

A) above
B) below
C) on
D) on or below
E) on or above

Question 33

The mean of the normal distribution is _________ and the standard deviation is __________.

A) 0; 0
B) 0; 1
C) 1; 1
D) 1; 0
E) 1; 2

Question 34

Which of the following performance measures is best used to analyze a well diversified portfolio?
I) Treynor ratio
II) Sharpe ratio
III) Jensen's alpha

A) III only
B) I and III only
C) II and III only
D) II only
E) I, II, and III

Question 35

You are comparing three portfolios that have differing Treynor ratios. Given this, you

A) Know that the portfolio with the lowest Treynor ratio is under-priced
B) Should invest in the portfolio with the highest Treynor ratio
C) Can safely assume that the portfolios have differing levels of total risk
D) Know the portfolios are all mis-priced
E) Can safely assume that the portfolios have differing levels of market risk

Question 36

The major difference between the Sharpe ratio and the Treynor ratio is that the Sharpe ratio analyzes _________ risk and the Treynor ratio analyzes ___________ risk.

A) total; total
B) total; systematic
C) systematic; systematic
D) systematic; total
E) None of the above.

Question 37

Which of the following performance measures is most closely related to the efficient frontier?

A) Treynor ratio.
B) Raw return.
C) Jensen-Treynor alpha.
D) Jensen's alpha.
E) Sharpe ratio.

Question 38

If you want to search for under-pricing assets, you should look for

A) Low betas
B) High betas
C) Low alphas
D) High alphas
E) Low standard deviations

Question 39

In the normal distribution, the probability of an observation being within plus or minus one standard deviation of the mean is about ________ percent.

A) 50
B) 67
C) 90
D) 95
E) 99

Question 40

In an efficient market, which of the following will be the same for every asset?
I) Treynor ratio
II) Sharpe ratio
III) Jensen's alpha

A) II only
B) I and III only
C) II and III only
D) I only
E) I, II, and III

Question 41

Which of the following performance metrics measures reward-to-risk?
I) Treynor ratio
II) Sharpe ratio
III) Jensen's alpha

A) II only
B) I and III only
C) I and II only
D) III only
E) I, II, and III

Question 42

Which of the following performance measures is zero for the market?
I) Treynor ratio
II) Sharpe ratio
III) Jensen's alpha

A) II only
B) I and III only
C) I and II only
D) III only
E) I, II, and III

Question 43

Which of the following performance measures is considered good when it is positive?
I) Treynor ratio
II) Sharpe ratio
III) Jensen's alpha

A) II only
B) I and III only
C) I and II only
D) III only
E) I, II, and III

Question 44

The probability of a 1% loss is based on __________ standard deviation below the mean.

A) 1.215
B) 1.645
C) 1.960
D) 2.326
E) 2.415

Question 45

How do you interpret this VaR statistic: Prob (R_p $\le$ -0.09) = 23%?

A) If your portfolio declines by 9% or more, that decline is expected to be followed by a 23% increase in value
B) Your portfolio is expected to lose at least 9%, but not more than 23% in any given year
C) There is a 23% chance that your portfolio will be worth at least 9% less one year from now than it is today
D) Sometime in the future, your portfolio is expected to lose 9% or more in a single year, but have an overall average rate of return of 23%
E) If your portfolio rises in value by at least 23%, you should expect a market correction of 9% or more

Question 46

Consider a portfolio with an initial expected return, beta, and standard deviation. Improvement in which of the performance measures will improve value-at-risk to the extent that the potential loss will decrease?
I) Treynor ratio
II) Sharpe ratio
III) Jensen's alpha

A) II only
B) I and III only
C) I and II only
D) III only
E) I, II, and III

Question 47

52. The best performance measure overall is:

A) the Treynor ratio.
B) the raw return.
C) the Sharpe ratio.
D) Jensen's alpha.
E) There is no best performance measure in all situations.

Question 48

The performance metric that measures how much a portfolio "beat the market" is:

A) the Treynor ratio.
B) the raw return.
C) the Jensen-Treynor alpha.
D) the Jensen's alpha.
E) the Sharpe ratio.

Question 49

When __________ of an asset is better than the comparable market measure, ___________ is also better than the market.

A) the Sharpe ratio; the Treynor ratio
B) Jensen's alpha; the Sharpe ratio
C) the raw return; Jensen's alpha
D) Jensen's alpha; the Treynor ratio
E) the Treynor ratio; the raw return

Question 50

You are a very conservative investor and thus want to keep a low risk portfolio. Which one of the following VaR measures would be best for your investment goal?

A) Prob (R_p $\le$ -0.09) = 100%
B) Prob (R_p $\le$ -0.09) = 50%
C) Prob (R_p $\le$ -0.09) = 25%
D) Prob (R_p $\le$ -0.09) = 10%
E) Prob (R_p $\le$ -0.09) = 1%

Question 51

In an active management strategy, the composition of the portfolio is

A) Stable
B) Dynamic
C) Determined in advance and never changed
D) Very seldomly revised
E) Benchmark indexed

Question 52

With a monthly standard deviation of a portfolio, $\sigma$ _M., what is the annual standard deviation?

A) $\sigma _ { \mathrm { M } } \times 12$
B) $\sigma _ { M } \times \sqrt { 12 }$

C) $\sqrt { \sigma _ { \mathrm { M } } }\times 12$

D) $\sigma _ { \mathrm { M } } /\sqrt { 12 }$

E) $\sqrt { 12 } / \sigma _ { \mathrm { M } }$

Question 53

A portfolio's return above or below the expected return given the asset's systematic risk is:

A) the Treynor ratio.
B) the raw return.
C) the Jensen-Treynor alpha.
D) the Jensen's alpha.
E) the Sharpe ratio.

Question 54

Which of the following performance measures requires a correlation coefficient to calculate the performance measure for a new portfolio of two or more assets?
I) Treynor ratio
II) Sharpe ratio
III) Jensen's alpha

A) II only
B) I and III only
C) I and II only
D) III only
E) I, II, and III

Question 55

Which of the following is not true about the Sharpe ratio?

A) An estimate for the beta of the portfolio is not required.
B) It penalizes a portfolio that is not diversified.
C) It allows us to find the best portfolio on the efficient frontier.
D) It is useful for measuring the performance of an individual asset.
E) All of the above are true about the Sharpe ratio.

Question 56

Without a risk-free asset in the hypothetical portfolio, the M² equals to

A) +1.
B) -1.
C) Positive infinity.
D) Negative infinity.
E) 0.

Question 57

To compute a 2-year VaR, the average return is calculated as

A) Twice the 1-year return
B) Being equal to the 1-year return
C) The 1-year return multiplied by (1 + the 1-year return)
D) (1 + one-year return)²
E) Taking square root of the 1-year return

Question 58

VaR is based on the.

A) Beta
B) Normal distribution
C) Efficient frontier
D) Security market line
E) Treynor ratio

Question 59

While you can lend at the risk-free rate but cannot borrow at that rate, your choice of a complete portfolio is

A) unaffected at all levels of risk.
B) separate from the shape of the Markowitz efficient frontier.
C) unaffected at low levels of risk but restricted at high levels of risk.
D) restricted at low levels of risk but unaffected at high levels of risk.
E) none of the above

Question 60

Which of the following performance measures is zero for the risk-free asset?
I) Treynor ratio
II) Sharpe ratio
III) Jensen's alpha

A) II only
B) I and III only
C) I and II only
D) III only
E) I, II, and III

Question 61

A portfolio with a beta of 0.9 has an expected return of 11 percent and a standard deviation of 24 percent. The expected return of the market is 12 percent, and the risk-free is 5 percent. What is Jensen's alpha for the portfolio?

A) -0.49%
B) -0.54%
C) -0.38%
D) -0.30%
E) -0.45%

Question 62

What is the Sharpe ratio of Portfolio A?
Refer: To: 13-72

A) 0.363
B) 0.431
C) 0.409
D) 0.400
E) 0.389

Question 63

A portfolio has an average return of 14 percent, a standard deviation of 27 percent, and a beta of 1.15. The risk-free rate is 4.5 percent, and the expected return of the market is 12 percent. What is the Sharpe ratio for the portfolio?

A) 0.21
B) 0.43
C) 0.35
D) 0.26
E) 0.31

Question 64

A portfolio with a beta of 0.9 has an expected return of 11 percent and a standard deviation of 24 percent. The expected return of the market is 12 percent, and the risk-free is 5 percent. What is the Sharpe ratio for the portfolio?

A) 0.25
B) 0.16
C) 0.29
D) 0.34
E) 0.21

Question 65

What is the Treynor ratio for Portfolio D?
Refer: To: 13-72

A) 0.078
B) 0.073
C) 0.083
D) 0.080
E) 0.086

Question 66

Which of the following is true regarding active portfolio management strategy?

A) The goal of active portfolio management is to earn an excess return on the risk-adjusted basis
B) An actively managed portfolio has lower total transaction costs
C) An actively managed portfolio has lower risk than the passive benchmark
D) A key to success for an actively managed portfolio is to maximize trading activity
E) All of the above

Question 67

A portfolio has a Treynor ratio of .068, a standard deviation of 16.40 percent, a beta of 1.16, and an expected return of 14.3 percent. What is the risk-free rate?
Refer: To: 13-72

A) 1.32 percent
B) 5.21 percent
C) 5.39 percent
D) 6.18 percent
E) 6.41 percent

Question 68

A portfolio has an average return of 14 percent, a standard deviation of 27 percent, and a beta of 1.15. The risk-free rate is 4.5 percent, and the expected return of the market is 12 percent. What is Jensen's alpha for the portfolio?

A) 0.705%
B) 0.625%
C) 0.875%
D) 0.550%
E) 0.920%

Question 69

What is the Sharpe ratio of Portfolio B?
Refer: To: 13-72

A) 0.363
B) 0.431
C) 0.409
D) 0.400
E) 0.389

Question 70

What is the Treynor ratio for Portfolio A?
Refer: To: 13-72

A) 0.078
B) 0.073
C) 0.083
D) 0.080
E) 0.086

Question 71

What is Jensen's alpha for portfolio D?
Refer: To: 13-72

A) 0.10%
B) 0.20%
C) 0.15%
D) -0.10%
E) -0.20%

Question 72

A portfolio has an average return of 9.7 percent, a standard deviation of 8.6 percent, and a beta of .72. The risk-free rate is 2.1 percent. What is the Treynor ratio?
Refer: To: 13-72

A) 0.098
B) 0.106
C) 0.121
D) 0.636
E) 0.884

Question 73

A portfolio has an average return of 14 percent, a standard deviation of 27 percent, and a beta of 1.15. The risk-free rate is 4.5 percent, and the expected return of the market is 12 percent. What is the Treynor ratio for the portfolio?

A) 0.0741
B) 0.0943
C) 0.0782
D) 0.0918
E) 0.0826

Question 74

Which of the following represents the best Sharpe ratio for an investment decision?

A) -1.64
B) -0.99
C) 0
D) 0.98
E) 1.46

Question 75

A passive portfolio management strategy is appropriate when

A) Capital market is inefficient
B) Investors have a unique investment philosophy
C) Investors have short investment horizons
D) Attempting to perform as well as the overall market on a risk-adjusted basis
E) All of the above

Question 76

Which portfolio(s) plot above the security market line?
Refer: To: 13-72

A) A only
B) B only
C) C only
D) A and C only
E) B and D only

Question 77

Which of the following is the technique employed by a passive portfolio management strategy?

A) Quantitative screens
B) Full replication
C) Use of factor models
D) Sector rotation
E) None of the above

Question 78

A portfolio with a beta of 0.9 has an expected return of 11 percent and a standard deviation of 24 percent. The expected return of the market is 12 percent, and the risk-free is 5 percent. What is the Treynor ratio for the portfolio?

A) 0.0701
B) 0.0667
C) 0.0775
D) 0.0810
E) 0.0725

Question 79

What is Jensen's alpha for Portfolio C?
Refer: To: 13-72

A) 0.40%
B) 0.20%
C) 0.35%
D) 0.30%
E) 0.25%

Question 80

A strategy of passive management is one in which, once established, the portfolio is

A) Readjusted on a regular basis
B) Only readjusted if prices decline
C) Largely left alone
D) Only readjusted if prices rise
E) Readjusted at the manager's discretion