Deck 18: Portfolio Performance Evaluation

Question 1

The ex-post characteristic line is the result of a simple linear regression model expressing the relationship between the excess return on a security and the

A) volatility of the security
B) market beta
C) excess return on the market portfolio
D) volatility of the market portfolio

Answer 1

C

Question 2

When measuring the quarterly portfolio return, a withdrawal near the beginning of the quarter requires

A) no adjustment to the values.
B) a reduction of the beginning and ending values.
C) a reduction of the beginning value.
D) a decrease of the beginning and increase in the ending values.

Answer 2

C

Question 3

Of the three methods to weight a market index, the ____ method involves summing the prices of the stocks in the index and dividing this sum by a constant in order to calculate an average price.

A) Price-weighting
B) Value-weighting
C) Equal-weighting
D) Geometric-mean

Answer 3

A

Question 4

Measures of returns include such methods as ___which is used when deposits or withdrawals occur sometime between the beginning and end of the investment interval.

A) time-weighted returns
B) the geometric mean
C) the arithmetic mean
D) dollar-weighted returns

Question 5

The measures of portfolio performance that involve beta, the ex-post alpha, and reward-to-volatility measures have been criticized because the rely heavily on the

A) CAPM
B) arbitrage pricing theory
C) risk free rate
D) market beta

Question 6

Comparing the dollar-weighted and time-weighted return methods, the

A) two methods give the same return for an actively managed portfolio.
B) time-weighted method is generally preferred.
C) time-weighted return is more dependent on uncontrollable deposits and withdrawals.
D) dollar-weighted return is not affected by clients' actions.

Question 7

The ___ ratio is a measure of risk-adjusted performance that uses a benchmark based on the ex-post security market line.

A) reward-to-volatility
B) M-squared
C) market timing
D) Sharpe

Question 8

A portfolio had a value of $10 million at the beginning of a quarter and a value of $102 million half way through the quarter. At this point, there was a deposit of $2 million and the portfolio value at the end of the quarter was $105 million. The time-weighted return for the quarter was

A) 2.98%.
B) -.96%.
C) 1.99%.
D) 4.21%.

Question 9

In selecting benchmark portfolios for comparison, the client should be certain that they represent

A) the best possible portfolio construction available
B) the best but not necessarily feasible portfolio
C) alternative portfolios that could have been chosen instead of the one chosen
D) portfolios of varying degrees of risk

Question 10

The _____ method to weight a market index is computed daily by multiplying the level of the index on the previous day by the arithmetic mean of the daily price relatives of the relevant stocks in the index.

A) Geometric-mean
B) Price-weighting
C) Value-weighting
D) Equal-weighting

Question 11

The procedure in which portfolio performance evaluators design a relevant portfolio for comparison is called

A) custom benchmarking.
B) performance attribution.
C) box plotting.
D) ex post beta.

Question 12

Because all the measures of portfolio performance except the reward-to-variability ratio, require the identification of a _____ surrogate, whatever is used can be criticized as being inadequate.

A) security market
B) capital market
C) market portfolio
D) market volatility

Question 13

The dollar-weighted return method involves finding the portfolio's

A) payback period.
B) net present value.
C) mean value.
D) internal rate of return.

Question 14

A portfolio had a value of $50 million at the beginning of a quarter and a value of $47 million half way through the quarter. At this point, there was a $4 million withdrawal, and the portfolio value at the end of the quarter was $41 million. The time-weighted return for the quarter was

A) - 6.9%.
B) -10.4%.
C) - 7.1%.
D) - 8.2%.

Question 15

A ___ index is a collection of securities whose prices are averaged to reflect the overall investment performance of a particular market for financial assets.

A) price
B) market
C) company
D) benchmark

Question 16

____ refers to the identification of sources of returns for a portfolio or security over a particular evaluation interval of time.

A) Reward to volatility
B) Performance attribution
C) Price relatives
D) Value weighting

Question 17

For a portfolio, the returns for 4 quarters are 2%, -4%, -2%, 10%. The annual return that is more accurate than adding the four values together is

A) -3.2%.
B) 6.3%.
C) 6.5%.
D) 5.6%.

Question 18

A portfolio that only holds stocks in large capital industrial stocks would most accurately use as a benchmark portfolio

A) Wilshire 5000.
B) DJIA.
C) Value Line Index.
D) S&P 500.

Question 19

The portfolio performance evaluation measure, known as M-squared, uses ____ as the relevant measure of risk and is based on the ex-post capital market line.

A) standard deviation
B) arithmetic mean
C) variation
D) beta

Question 20

The reward-to-volatility ratio is calculated by dividing the portfolio average excess return by its_____.
A) market risk

A) security risk
B) security beta
C) ex-post alpha

Question 21

The use of Treasury Bills to set the riskfree rate tends to

A) set a large riskfree rate.
B) favor aggressive portfolios.
C) set return benchmarks for margin portfolios that are too high.
D) assume too large a borrowing rate.

Question 22

The Sharpe reward-to-variability ratio does not need the

A) beta of the portfolio.
B) average riskfree return.
C) average return of the portfolio.
D) portfolio's average excess return.

Question 23

When the portfolio manager identifies the highest certainty equivalent return with the feasible risky portfolio, it is the same as identifying the feasible portfolio that places the investor on the highest possible ___________.

A) risky asset
B) risk free portfolio
C) indifference curve
D) benchmark portfolio

Question 24

The ex post characteristic line for a successful market timer will be

A) flat.
B) quadratic with positive slope.
C) linear with a negative slope.
D) quadratic with negative slope.

Question 25

If an investor buys and holds a stock for four years, earning 15% the first year; -8% for the second; 21% for the third; and 11% for the last year, what was the annual arithmetic return?

A) 9.00%
B) 9.75%
C) 10.00%
D) 11.25%

Question 26

What is the annual geometric return for an investor who invests in a stock for 2 years if he earned 18% the first year and a negative 8% for the second?

A) 2.15%
B) 3.75%
C) 4.11%
D) 4.19%

Question 27

Which of the following measures of portfolio performance is not based on the Capital Asset Pricing Model?

A) the reward-to-volatility ratio
B) the ex-post alpha
C) the linear regression
D) the Sharpe ratio

Question 28

The correlation coefficient of the excess returns for Portfolio Y and the market is .8. This means the percentage of excess returns that cannot be attributed to the market is

A) 64%.
B) 36%.
C) 20%.
D) 16%.

Question 29

When using linear regression with a dummy variable to measure a market timer's performance, the characteristic line for a superior performer would have the following characteristic

A) the smaller the market return, the greater the slope.
B) slope on the right greater than the slope on the left.
C) a straight line over the whole range of market returns.
D) a flat shape with slope of 0.

Question 30

A method that attempts to attribute the return of a portfolio to several different factors is the method of

A) simple linear regression.
B) linear regression with a dummy variable.
C) quadratic programming.
D) multiple regression.

Question 31

During 1986-1990, the mean quarterly returns on treasury bills and the S+P 500 were 1.46% and 3.95%, respectively. Using the SML, if a portfolio had a beta of 1.2, its expected quarterly return would be

A) 5.7%.
B) 6.5%.
C) 4.8%.
D) 6.2%.

Question 32

The RVOL ratio shows Portfolio A had a superior performance; whereas, the RVAR ratio shows it to have an inferior performance. This can be explained if Portfolio A has

A) large market and small unsystematic risk.
B) large market and large unique risk.
C) large systematic and no unique risk.
D) small systematic and large unique risk.

Question 33

If an investor purchased a stock and held it for three years, earning 20% the first year; 10% , the second; and 8%, the third, what was the annual arithmetic return?

A) 10%
B) 8%
C) 6%
D) 4%

Question 34

One reason the time-weighted returns calculation is preferable to the dollar-weighted returns calculation is because the

A) latter measure is strongly impacted by the size and timing of cash flows
B) former measure always overestimates returns
C) latter measure will not account for dividends
D) latter measure is overly price-sensitive

Question 35

The Sharpe reward-to-variability ratio

A) is based on total risk.
B) will always give the same portfolio performance conclusion as the reward-to-volatility.
C) is based on the SML.
D) will provide the same rank order of portfolio performance as the reward-to-volatility.

Question 36

If a client has many assets other than the portfolio, then the relevant measure of the portfolio risk is

A) total risk.
B) standard deviation.
C) market risk.
D) unique risk.

Question 37

A market timer would be expected to have a portfolio with

A) a beta of 1.4 if an up market is anticipated.
B) a beta of 1.2 if a down market is anticipated.
C) a beta of .8 if an up market is anticipated.
D) little turnover.

Question 38

To calculate Treynor's reward-to-volatility ratio, the analyst does not need the

A) average riskfree yield.
B) beta for the portfolio.
C) average portfolio excess return.
D) market return standard deviations.

Question 39

The correlation coefficient of the excess returns for Portfolio This means the percentage of excess profits attributed to the market is

A) 30%.
B) 49%.
C) 70%.
D) 28%.

Question 40

For the last five years the S&P 500 has had an average quarterly return of 4.5% and a standard deviation of 11.6%. If the average riskfree return was 2.2% per quarter, the slope of the S&P 500's CML is

A) .42%.
B) .02%.
C) 3.62.
D) .2.

Question 41

For the last quarter, the return for Portfolio A was 6.2% with a beta of .9. The market return was 7.6% and the riskfree return was 2.8%. The ex post alpha for Portfolio A is .5 and the error for Portfolio A's excess returns is

A) -1.24%.
B) .96%.
C) - .96%.
D) .72%.

Question 42

Portfolio A has had an average quarterly return of 4.7% and a beta of 1.4. The average risk free return has been 2.6%. The reward-to-volatility ratio value is

A) 1.27.
B) .67.
C) 1.5.
D) 1.76.

Question 43

Diversification of judgment where clients will split their assets among a number of mangers is done in order to avoid

A) the random errors in judgment by individual managers
B) being excessively exposed to the possible poor performance of a particular investment style
C) serious harm inflicted by managers as a group
D) serious harm by the investment decisions of one or two managers.

Question 44

During the past five years, Portfolio A has had a mean return of 3.7% per quarter and a beta of 1.2. During the same time period, the market averaged a 3.2% return, and treasury bills averaged a 2.1% return. The value of alpha a. is

A) .14.
B) .28.
C) -.14.
D) .56.

Question 45

Portfolio C has a reward-to-volatility ratio of 1.8. For the same period, the average market return was 3.2% and the average riskfree return was 2%. The comparison is

A) the slope of the SML is 1.2 and Portfolio C had an inferior performance.
B) there is no standard to determine Portfolio C's performance.
C) the slope of the SML is 1.2 and Portfolio C had a superior performance.
D) the slope of the SML is 1.6 and Portfolio C had an inferior performance.

Question 46

Portfolio C has an ex post alpha of +1.7 and the slope of the SML is 2.4. This means the reward-to-volatility ratio for Portfolio C will be

A) between 1.7 and 2.4.
B) also 1.7.
C) less than 2.4.
D) greater than 2.4.

Question 47

Weingarten Fund earns a 21% return for the first year; a 12% return for the second year; and a negative 9% for the third, what is the annual geometric return for Weingarten?

A) 5.55%
B) 6.77%
C) 6.8%
D) 7.2%

Question 48

During the past four years, Portfolio X has had a mean return of 4.3% per quarter and beta of .9. During the same time period, the market averaged a 4.6% return, and 90 day treasury bills averaged a 1.6% return. Compared to the ex post SML,

A) Portfolio X has a negative ex post alpha.
B) Portfolio X has an average performance.
C) Portfolio X had an inferior performance.
D) Portfolio X had a superior performance.

Question 49

Portfolio X had an average quarterly return of 5.2% with a standard deviation of 6.5%. The market had an average quarterly return of 6.1% with a standard deviation of 10.5%. The average riskfree rate was 3%. Using the reward-to-variability ratio,

A) the portfolio had an inferior performance.
B) Portfolio X lies above the ex post CML.
C) Portfolio X has a slope lower than that of the CML.
D) there is insufficient data to compare them.

Question 50

If an investor buys a stock and holds it for three years, earning 15% for the first year; negative 15% for the second; and 12% for the third, what was the annual geometric return?

A) 3.1%
B) 3.75%
C) 4.11%
D) 5.66%

Question 51

For a portfolio with superior performance, its characteristic line will

A) have a more positive slope than the SML.
B) be flat.
C) intercept the SML at the average market return.
D) lie below the SML.

Question 52

When simple linear regression is used to develop a portfolio's ex post characteristic line, the additional term calculated is the

A) alpha.
B) slope.
C) random error term.
D) intercept.

Question 53

Portfolio managers who anticipate an increase in interest rates should

A) act to keep the duration constant
B) increase the portfolio duration
C) decrease the portfolio duration
D) invest in junk bonds

Question 54

A criticism of the S&P500 used as a market index would include which one of the following statements?

A) The S&P500 is a value-weighted rather than a price-weighted index.
B) It is nearly impossible for an investor to form a portfolio that replicates the S&P500 over time.
C) Transaction costs may be effectively eliminated from the index.
D) Stocks in the Index are not replaced often enough to cause problems.

Question 55

Which of the following statements accurately represents what clients can do to ensure that their portfolios reflect their own specific risk-return preferences?

A) Clients need to develop monitoring procedures to evaluate their manager's investment activities relative to predefined goals and constraints
B) Clients need not pay very close attention to their investment objectives if they have an effective relationship with their manager
C) The client will have to subordinate their individual preferences to all the clients in the management firm for optimal results.
D) Rather than give overly detailed investment objectives, the client should be prepared to allow their manager to interpret for them the optimal tradeoff between risk and return