Question 1

The tracking error of an optimized portfolio can be expressed in terms of the ____________ of the portfolio and thus reveals ____________.
A)return; portfolio performance
B)total risk; portfolio performance
C)beta; portfolio performance
D)beta; benchmark risk
E)relative return; benchmark risk

Accepted Answer

The tracking error of an optimized portfolio can be expressed in terms of the beta of the portfolio and thus reveals benchmark risk.

Question 2

If a portfolio manager consistently obtains a high Sharpe measure, the manager's forecasting ability
A)is above average.
B)is average.
C)is below average.
D)does not exist.
E)cannot be determined based on the Sharpe measure.

Accepted Answer

The manager with the highest Sharpe measure presumably has true forecasting abilities.

Question 3

Active portfolio managers try to construct a risky portfolio with
A)a higher Sharpe measure than a passive strategy.
B)a lower Sharpe measure than a passive strategy.
C)the same Sharpe measure as a passive strategy.
D)very few securities.

Accepted Answer

A higher Sharpe measure than a passive strategy is indicative of the benefits of active management.

Question 4

Passive portfolio management consists of
A)market timing.
B)security analysis.
C)indexing.
D)market timing and security analysis.
E)None of the options

Accepted Answer

Although one can engage in various degrees of active portfolio management (security selection without market timing and vice versa), the most active portfolio management strategy consists of engaging in both pursuits.Passive management is an indexing strategy.

Question 5

Benchmark risk
A)is inevitable and is never a significant issue in practice.
B)is inevitable and is always a significant issue in practice.
C)cannot be constrained to keep a Treynor-Black portfolio within reasonable weights.
D)can be constrained to keep a Treynor-Black portfolio within reasonable weights.

Accepted Answer

Benchmark portfolio risk can be constrained to keep a Treynor-Black portfolio within reasonable weights.

Question 6

Tracking error is defined as
A)the difference between the returns on the overall risky portfolio versus the benchmark return.
B)the variance of the return of the benchmark portfolio.
C)the variance of the return difference between the portfolio and the benchmark.
D)the variance of the return of the actively managed portfolio.

Accepted Answer

Tracking error is defined as the difference between the returns on the overall risky portfolio versus the benchmark return.

Question 7

The Black-Litterman model is geared toward ____________ while the Treynor-Black model is geared toward ____________.
A)security analysis; security analysis
B)asset allocation; asset allocation
C)security analysis; asset allocation
D)asset allocation; security analysis
E)None of the options

Accepted Answer

The Black-Litterman model is geared toward asset allocation while the Treynor-Black model is geared toward security analysis.

Question 8

The ____________ model allows the private views of the portfolio manager to be incorporated with market data in the optimization procedure.
A)Black-Litterman
B)Treynor-Black
C)Treynor-Mazuy
D)Black-Scholes

Accepted Answer

The Black-Litterman model allows the private views of the portfolio manager to be incorporated with market data in the optimization procedure.

Question 9

Even low-quality forecasts have proven to be valuable because R-squares of only ____________ in regressions of analysts' forecasts can be used to substantially improve portfolio performance.
A)0.656
B)0.452
C)0.258
D)0.153
E)0.001

Accepted Answer

The text provides an example where forecasts improved as r-squared improved from 0.001134 to 0.001536.

Question 10

Active portfolio management consists of
A)market timing.
B)security analysis.
C)indexing.
D)market timing and security analysis.
E)None of the options

Accepted Answer

Although one can engage in various degrees of active portfolio management (security selection without market timing and vice versa), the most active portfolio management strategy consists of engaging in both pursuits.

Question 11

The Black-Litterman model and Treynor-Black model are
A)nice in theory but practically useless in modern portfolio management.
B)complementary tools that should be used in portfolio management.
C)contradictory models that cannot be used together; therefore, portfolio managers must choose which one suits their needs.
D)not useful due to their complexity.
E)None of the options

Accepted Answer

The Black-Litterman model and Treynor-Black model are complementary tools that should be used in portfolio management.

Question 12

If you begin with a ______ and obtain additional data from an experiment you can form a ______.
A)posterior distribution; prior distribution
B)prior distribution; posterior distribution
C)tight posterior; Bayesian analysis
D)tight prior; Bayesian analysis
E)None of the options

Accepted Answer

If you begin with a prior distribution and obtain additional data from an experiment you can form a posterior distribution.

Question 13

The Treynor-Black model requires estimates of
A)alpha/beta.
B)alpha/beta/residual variance.
C)beta/residual variance.
D)alpha/residual variance.

Accepted Answer

Estimates of alpha, beta, and residual risk are required to determine the optimal weight of each security in the portfolio.

Question 14

____________ can be used to measure forecast quality and guide in the proper adjustment of forecasts.
A)Regression analysis
B)Exponential smoothing
C)ARIMA
D)Moving average models
E)GAUSS

Accepted Answer

Regression analysis can be used to measure forecast quality and guide in the proper adjustment of forecasts.

Question 15

The Treynor-Black model is a model that shows how an investment manager can use security analysis and statistics to construct
A)a market portfolio.
B)a passive portfolio.
C)an active portfolio.
D)an index portfolio.
E)a balanced portfolio.

Accepted Answer

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

Question 16

Absent research, you should assume the alpha of a stock is
A)zero.
B)positive.
C)negative.
D)not zero.
E)zero or positive.

Accepted Answer

In efficient markets, alpha should be assumed to be zero.

Question 17

Alpha forecasts must be ____________ to account for less-than-perfect forecasting quality.When alpha forecasts are ____________ to account for forecast imprecision, the resulting portfolio position becomes ____________.
A)shrunk; shrunk; far less moderate
B)shrunk; shrunk; far more moderate
C)grossed up; grossed up; far less moderate
D)grossed up; grossed up; far more moderate
E)None of the options

Accepted Answer

Alpha forecasts must be shrunk to account for less-than-perfect forecasting quality.When alpha forecasts are shrunk to account for forecast imprecision, the resulting portfolio position becomes far more moderate.

Question 18

The critical variable in the determination of the success of the active portfolio is
A)alpha/systematic risk.
B)alpha/nonsystematic risk.
C)gamma/systematic risk.
D)gamma/nonsystematic risk.

Accepted Answer

A portfolio with a positive alpha is outperforming the market.If this portfolio also has a low degree of nonsystematic risk, the portfolio is adequately diversified.

Question 19

In the Treynor-Black model
A)portfolio weights are sensitive to large alpha values which can lead to infeasible long or short positions for many portfolio managers.
B)portfolio weights are not sensitive to large alpha values which can lead to infeasible long or short positions for many portfolio managers.
C)portfolio weights are sensitive to large alpha values which can lead to the optimal portfolio for most portfolio managers.
D)portfolio weights are not sensitive to large alpha values which can lead to the optimal portfolio for most portfolio managers.

Accepted Answer

In the Treynor-Black model portfolio weight are sensitive to large alpha values which can lead to infeasible long or short positions for many portfolio managers.

Question 20

Benchmark risk is defined as
A)the return difference between the portfolio and the benchmark.
B)the standard deviation of the return of the benchmark portfolio.
C)the standard deviation of the return difference between the portfolio and the benchmark.
D)the standard deviation of the return of the actively managed portfolio.

Accepted Answer

Benchmark portfolio risk is defined as the standard deviation of the return difference between the portfolio and the benchmark.

Quiz 27: The Theory of Active Portfolio Management

The tracking error of an optimized portfolio can be expressed in terms of the of the portfolio and thus reveals .

If a portfolio manager consistently obtains a high Sharpe measure, the manager's forecasting ability

Active portfolio managers try to construct a risky portfolio with

Passive portfolio management consists of

Benchmark risk

Tracking error is defined as

The Black-Litterman model is geared toward while the Treynor-Black model is geared toward .

The ____________ model allows the private views of the portfolio manager to be incorporated with market data in the optimization procedure.

Even low-quality forecasts have proven to be valuable because R-squares of only ____________ in regressions of analysts' forecasts can be used to substantially improve portfolio performance.

Active portfolio management consists of

The Black-Litterman model and Treynor-Black model are

If you begin with a and obtain additional data from an experiment you can form a .

The Treynor-Black model requires estimates of

____________ can be used to measure forecast quality and guide in the proper adjustment of forecasts.

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

Absent research, you should assume the alpha of a stock is

Alpha forecasts must be to account for less-than-perfect forecasting quality.When alpha forecasts are to account for forecast imprecision, the resulting portfolio position becomes .

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

In the Treynor-Black model

Benchmark risk is defined as