Question 1

A purely passive strategy

Accepted Answer

A purely passive strategy uses only index funds, which are designed to track a specific market index such as the S&P 500. This strategy does not involve any attempts to beat the market through stock picking or tactical asset allocation. It is a low-cost approach that can provide exposure to a diversified portfolio of stocks or bonds.

Question 2

Consider the Treynor-Black model.The alpha of an active portfolio is 1%.The expected return on the market index is 16%.The variance of the return on the market portfolio is 4%.The nonsystematic variance of the active portfolio is 1%.The risk-free rate of return is 8%.The beta of the active portfolio is 1.05.The optimal proportion to invest in the active portfolio is _________.

Accepted Answer

Using Treynor-Black model, we can calculate the optimal proportion to invest in the active portfolio using the following formula:

w = [(alpha - (r_f)) / (B^2 * market variance) + nonsystematic variance]

where,
alpha = 1%
r_f = 8%
B = 1.05
market variance = 4%
nonsystematic variance = 1%

Substituting the values in the formula, we get:

w = [(0.01 - 0.08) / (1.05^2 * 4%) + 1%] = 0.513 or 51.3%

Therefore, the best choice is option C) 51.3%, which represents the optimal proportion to invest in the active portfolio.

Question 3

According to the Treynor-Black model,the weight of a security in the active portfolio depends on the ratio of __________ to _________.

Accepted Answer

The Treynor-Black model suggests that the weight of a security in the active portfolio is determined by the ratio of the degree of mispricing to the nonsystematic risk of the security. This model combines both active and passive portfolio strategies to maximize returns.

Question 4

Consider the Treynor-Black model.The alpha of an active portfolio is 2%.The expected return on the market index is 16%.The variance of return on the market portfolio is 4%.The nonsystematic variance of the active portfolio is 1%.The risk-free rate of return is 8%.The beta of the active portfolio is 1.The optimal proportion to invest in the active portfolio is _________.

Accepted Answer

The answer of Consider the Treynor-Black model.The alpha of an...

Question 5

Variable life insurance

Accepted Answer

Variable life insurance combines life insurance with a tax-deferred annuity, provides a minimum death benefit that increases subject to investment performance, and can be converted to a stream of income.

Question 6

The Treynor-Black model assumes that

Accepted Answer

All three statements are true and are assumptions of the Treynor-Black model. The model aims to form an active portfolio of a limited number of mispriced securities, acknowledges the cost of less than full diversification coming from the nonsystematic risk of the mispriced stock, and determines the optimal weight of the mispriced security in the portfolio based on the degree of mispricing, market sensitivity, and degree of nonsystematic risk.

Question 7

Active portfolio managers try to construct a risky portfolio with _________.

Accepted Answer

Active portfolio managers aim to outperform the passive strategies by constructing a risky portfolio with a higher Sharpe measure. The Sharpe measure is the excess return of a portfolio compared to the risk-free rate, divided by the standard deviation of the portfolio's returns. A higher Sharpe measure indicates a higher return for each unit of risk taken by the portfolio. Therefore, active managers aim to construct portfolios with a higher Sharpe measure than the passive strategies.

Question 8

Passive portfolio management consists of _________.

Accepted Answer

Passive portfolio management involves implementing an investment strategy that seeks to closely match the performance of a designated market benchmark or index. This is typically accomplished through the use of indexing, whereby a portfolio is constructed to mirror the asset allocation and weighting of a particular index, rather than relying on market timing or detailed security analysis. Therefore, the correct answer is C) indexing.

Question 9

Consider the Treynor-Black model.The alpha of an active portfolio is 3%.The expected return on the market index is 18%.The standard deviation of the return on the market portfolio is 25%.The nonsystematic standard deviation of the active portfolio is 15%.The risk-free rate of return is 6%.The beta of the active portfolio is 1.2.The optimal proportion to invest in the active portfolio is _________.

Accepted Answer

The answer of Consider the Treynor-Black model.The alpha of an...

Question 10

One property of a risky portfolio that combines an active portfolio of mispriced securities with a market portfolio is that,when optimized,its squared Sharpe measure increases by the square of the active portfolio's

Accepted Answer

The squared Sharpe measure of a combined portfolio increases by the square of the active portfolio's appraisal ratio, which measures the active portfolio's performance relative to its risk.

Question 11

A purely passive strategy is defined as

Accepted Answer

A purely passive strategy is one that does not attempt to outperform the market but rather seeks to match the performance of a particular index, such as the S&P 500. This is typically achieved by investing in index funds, which hold all or a representative sample of the securities in the index. The asset allocation in a purely passive strategy is fixed and does not vary with market conditions. Therefore, choices A and B are both correct. The strategy does not necessarily need to be mean-variance efficient, so choice C is not correct. Therefore, the best choice is D.

Question 12

The investment horizon is:

Accepted Answer

The investment horizon refers to the length of time that the investor expects to hold their investments before selling or liquidating them. This can be influenced by a variety of factors such as the investor's goals, risk tolerance, and financial needs, but ultimately it is determined by the date at which the portfolio is expected to be fully or partially liquidated. A, B, and C may be factors that influence the investment horizon, but they do not define it.

Question 13

The critical variable in the determination of the success of the active portfolio is

Accepted Answer

The critical variable in the determination of the success of the active portfolio is alpha, which represents the excess return of the portfolio compared to its benchmark. Alpha can be decomposed into two parts: systematic risk and nonsystematic risk. Systematic risk (i.e., beta) is the risk that cannot be diversified away and affects the entire market, while nonsystematic risk (i.e., idiosyncratic risk) is the risk that is unique to a particular company or sector and can be diversified away. Therefore, the best choice is B, which represents alpha/nonsystematic risk.

Question 14

The longest time horizons are likely to be set by

Accepted Answer

Pension funds are designed to provide long-term retirement benefits for their participants, which gives them a longer time horizon compared to other financial institutions. Property and casualty insurance companies may have a long-term outlook, but their investment strategies are driven by policyholder liabilities and therefore may not be as long-term focused as pension funds. Banks typically have shorter time horizons due to their business model and regulatory requirements.

Question 15

Active portfolio management consists of _________.

Accepted Answer

Active portfolio management involves both market timing (deciding when to buy or sell securities based on market trends) and security analysis (researching individual securities to make informed investment decisions). Indexing, on the other hand, involves tracking the performance of a market index rather than actively selecting individual securities. Therefore, choices A and B are both involved in active portfolio management, while C is not.

Question 16

The Treynor-Black model is a model that shows how an investment manager can use security analysis and statistics to construct _________.

Accepted Answer

The Treynor-Black model is designed to show how an investment manager can use security analysis and statistics to construct an active portfolio. This portfolio is constructed to outperform the market, rather than simply replicate its performance (as with a passive or index portfolio), or balance risk and return (as with a balanced portfolio). Therefore, the best choice is C - an active portfolio.

Question 17

The Treynor-Black model

Accepted Answer

The Treynor-Black model is a capital asset pricing model (CAPM) that considers both macroeconomic and microeconomic risks. It is relatively easy to implement, as it only requires data on the security's beta, the risk-free rate, and the expected market return.

Question 18

In the Treynor-Black model,the weight of each security in the portfolio should be proportional to its _________.

Accepted Answer

In the Treynor-Black model, the weight of each security in the portfolio should be proportional to its alpha divided by beta and residual variance. Therefore, the best choice is B, which includes all three factors, alpha, beta, and residual variance. The other choices only include two of these factors or the wrong combination of factors.

Question 19

The security selection form of active portfolio management relies on __________ forecasting and the market timing form of active portfolio management relies on __________ forecasting.

Accepted Answer

The security selection form of active portfolio management relies on microeconomic forecasting, which involves analyzing individual companies and their financial health. On the other hand, the market timing form of active portfolio management relies on macroeconomic forecasting, which involves analyzing broader economic trends and market movements. Therefore, option C is the correct answer.

Question 20

The Treynor-Black model does not assume that

Accepted Answer

The Treynor-Black model does not assume that indexing is always optimal.

Quiz 21: Investors and the Investment Process