Question 1

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?

Accepted Answer

B

Question 2

Which index is most appropriate as a benchmark for a large-cap mutual fund?

Accepted Answer

The S&P 500 is a widely recognized index that tracks the performance of 500 of the largest publicly traded companies in the United States. It is a suitable benchmark for a large-cap mutual fund because it represents a broad cross-section of the large-cap market.

Question 3

The information ratio is calculated as the ratio of:

Accepted Answer

The information ratio is calculated as the ratio of mean active return (the difference between the portfolio return and the benchmark return) to tracking risk (the standard deviation of the active return).

Question 4

The information in the following table is to be used to answer questions 
$\begin{array}{|l|c|c|c|c|}
\hline \text { Fund } & \text { Standard Deviation } & \text { Beta } & \begin{array}{c}
\text { Jensen's } \
\text { Alpha }
\end{array} & \mathbf{R}^{\mathbf{2}} \
\hline \text { Fund 1 } & 1.97 & 1.0 & 1.3 & 0.95 \
\hline \text { Fund 2 } & 2.97 & 0.8 & 0.6^{*} & 0.80 \
\hline \text { Fund 3 } & 3.82 & 1.2 & -3.5^{*} & 0.90 \
\hline \text { Fund 4 } & 3.50 & 1.4 & 4.2 & 0.65 \
\hline
\end{array}$
-Based on Jensen's performance measure, which fund significantly outperformed?

Accepted Answer

The answer of The information in the following table is...

Question 5

The Global Investment Performance Standards (GIPS) were created by:

Accepted Answer

The Global Investment Performance Standards (GIPS) were created by the CFA Institute to provide a standardized, industry-wide approach for investment firms to calculate and present their investment performance to ensure transparency and comparability.

Question 6

Which of the following measures uses the standard deviation and evaluates portfolio performance on the basis of both return and diversification.

Accepted Answer

The Sharpe ratio uses the standard deviation to evaluate portfolio performance by measuring the excess return per unit of risk, considering both return and diversification.

Question 7

The information in the following table is to be used to answer questions 
$\begin{array}{|l|c|c|c|c|}
\hline \text { Fund } & \text { Standard Deviation } & \text { Beta } & \begin{array}{c}
\text { Jensen's } \
\text { Alpha }
\end{array} & \mathbf{R}^{\mathbf{2}} \
\hline \text { Fund 1 } & 1.97 & 1.0 & 1.3 & 0.95 \
\hline \text { Fund 2 } & 2.97 & 0.8 & 0.6^{*} & 0.80 \
\hline \text { Fund 3 } & 3.82 & 1.2 & -3.5^{*} & 0.90 \
\hline \text { Fund 4 } & 3.50 & 1.4 & 4.2 & 0.65 \
\hline
\end{array}$
-Which fund's returns are best explained by the market's returns?

Accepted Answer

Fund 1 has the highest R2, which indicates that its returns are best explained by the market's returns.

Question 8

Superior portfolio performance can result from:

Accepted Answer

Superior portfolio performance can result from either superior selectivity, which involves choosing undervalued securities, or timing performance, which involves predicting market movements effectively.

Question 9

The information in the following table is to be used to answer questions 
$\begin{array}{|l|c|c|c|c|}
\hline \text { Fund } & \text { Standard Deviation } & \text { Beta } & \begin{array}{c}
\text { Jensen's } \
\text { Alpha }
\end{array} & \mathbf{R}^{\mathbf{2}} \
\hline \text { Fund 1 } & 1.97 & 1.0 & 1.3 & 0.95 \
\hline \text { Fund 2 } & 2.97 & 0.8 & 0.6^{*} & 0.80 \
\hline \text { Fund 3 } & 3.82 & 1.2 & -3.5^{*} & 0.90 \
\hline \text { Fund 4 } & 3.50 & 1.4 & 4.2 & 0.65 \
\hline
\end{array}$
-Which fund has the most total risk?

Accepted Answer

The answer of The information in the following table is...

Question 10

The information in the following table is to be used to answer questions 
$\begin{array}{|l|c|c|c|c|}
\hline \text { Fund } & \text { Standard Deviation } & \text { Beta } & \begin{array}{c}
\text { Jensen's } \
\text { Alpha }
\end{array} & \mathbf{R}^{\mathbf{2}} \
\hline \text { Fund 1 } & 1.97 & 1.0 & 1.3 & 0.95 \
\hline \text { Fund 2 } & 2.97 & 0.8 & 0.6^{*} & 0.80 \
\hline \text { Fund 3 } & 3.82 & 1.2 & -3.5^{*} & 0.90 \
\hline \text { Fund 4 } & 3.50 & 1.4 & 4.2 & 0.65 \
\hline
\end{array}$
-Which of the funds has the most market risk?

Accepted Answer

Fund 4 has the highest beta of 1.4, indicating it has the most market risk compared to the other funds.

Question 11

The information in the following table is to be used to answer questions 
$\begin{array}{|l|c|c|c|c|}
\hline \text { Fund } & \text { Standard Deviation } & \text { Beta } & \begin{array}{c}
\text { Jensen's } \
\text { Alpha }
\end{array} & \mathbf{R}^{\mathbf{2}} \
\hline \text { Fund 1 } & 1.97 & 1.0 & 1.3 & 0.95 \
\hline \text { Fund 2 } & 2.97 & 0.8 & 0.6^{*} & 0.80 \
\hline \text { Fund 3 } & 3.82 & 1.2 & -3.5^{*} & 0.90 \
\hline \text { Fund 4 } & 3.50 & 1.4 & 4.2 & 0.65 \
\hline
\end{array}$
-Which fund is least well-diversified?

Accepted Answer

The R² value indicates the proportion of a fund's movements that can be explained by movements in the market index. A lower R² value suggests less diversification. Fund 4 has the lowest R² value of 0.65, indicating it is the least well-diversified.

Question 12

What alternative portfolio mirrors the objectives of a portfolio under evaluation?

Accepted Answer

A benchmark portfolio is used to mirror the objectives of a portfolio under evaluation, serving as a standard for comparison.

Question 13

Relative to the Sharpe ratio, the Sortino ratio will make a portfolio's performance look more favorable if the portfolio has experienced:

Accepted Answer

The Sortino ratio only considers downside volatility (negative returns) rather than total volatility like the Sharpe ratio. If a portfolio has fewer extreme negative returns, the Sortino ratio will be higher, making the performance look more favorable compared to the Sharpe ratio.

Question 14

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:

Accepted Answer

The answer of A portfolio with a beta of 0.8...

Question 15

The reward-to-variability ratio (Sharpe ratio) measures:

Accepted Answer

The Sharpe ratio measures the excess return (return above the risk-free rate) per unit of total risk (standard deviation of the portfolio's return).

Question 16

What is the major question when evaluating a portfolio's performance?

Accepted Answer

The major question when evaluating a portfolio's performance is whether the return is adequate to compensate for the risk taken. This involves assessing the risk-return trade-off to ensure that the returns justify the level of risk involved.

Question 17

If we are to assess performance carefully, we must do so on what kind of basis?

Accepted Answer

Risk-adjusted performance assessment considers the level of risk taken by an investment manager in generating returns, providing a more accurate evaluation of their performance.

Question 18

Which of the following statements about the Sharpe ratio and Treynor ratio is most accurate? The Sharpe ratio is based on:

Accepted Answer

The Sharpe ratio measures excess return per unit of total risk (standard deviation), while the Treynor ratio measures excess return per unit of systematic risk (beta).

Question 19

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:

Accepted Answer

The Sharpe ratio and Treynor ratio both measure risk-adjusted returns, but the Sharpe ratio uses total risk (standard deviation) while the Treynor ratio uses systematic risk (beta). Since both portfolios are well-diversified, the rankings by both ratios will be consistent.

Question 20

According to Jensen's differential return measure, what is alpha?

Accepted Answer

Alpha, according to Jensen's differential return measure, is a measure of the superior or inferior performance of a portfolio compared to the expected return predicted by the Capital Asset Pricing Model (CAPM).

Quiz 22: Evaluation of Investment Performance