Question 1

The average returns, standard deviations and betas for three funds are given below along with data for the S&P 500 index. The risk-free return during the sample period is 6%.  You wish to evaluate the three mutual funds using the Treynor measure for performance evaluation. The fund with the highest Treynor measure of performance is ________.
A)Fund A
B)Fund B
C)Fund C
D)indeterminable

Accepted Answer

To evaluate the funds using Treynor measure, we need to calculate the excess return per unit of beta for each fund. Treynor measure = (return of the fund - risk-free rate) / beta of the fund.

For Fund A:
Treynor measure = (14% - 6%) / 0.8 = 10% / 0.8 = 12.5%

For Fund B:
Treynor measure = (15% - 6%) / 1.1 = 9% / 1.1 = 8.18%

For Fund C:
Treynor measure = (17% - 6%) / 1.5 = 11% / 1.5 = 7.33%

Therefore, Fund B has the highest Treynor measure of 8.18%. So, the answer is B.

Question 2

Which one of the following averaging methods is the preferred method of constructing returns series for use in evaluating portfolio performance?
A)Geometric average
B)Arithmetic average
C)Dollar-weighted
D)Internal

Accepted Answer

The geometric average is the preferred method of constructing returns series for use in evaluating portfolio performance because it accounts for compounding returns. The arithmetic average doesn't account for the effect of compounding and can overstate the portfolio's performance. Dollar-weighted returns are useful in evaluating an individual investor's performance, but not necessarily for evaluating the performance of a portfolio as a whole. Internal rate of return (IRR) is a more complex method that takes into account the timing and size of cash flows, making it useful for analyzing private equity or real estate investments, but not necessarily applicable to evaluating portfolio performance in general.

Question 3

The average returns, standard deviations and betas for three funds are given below along with data for the S&P 500 index. The risk-free return during the sample period is 6%.  You wish to evaluate the three mutual funds using the Jensen measure for performance evaluation. The fund with the highest Jensen measure of performance is ________.
A)Fund A
B)Fund B
C)Fund C
D)S&P500

Accepted Answer

To calculate the Jensen measure, we use the formula:
Jensen Measure = Average Return - [Risk-free Rate + Beta*(Average Market Return - Risk-free Rate)]

For Fund A: Jensen Measure = 10% - [6% + 0.8*(10% - 6%)] = 9.2%
For Fund B: Jensen Measure = 12% - [6% + 1.2*(10% - 6%)] = 11.2%
For Fund C: Jensen Measure = 8% - [6% + 1.5*(10% - 6%)] = 6%

Therefore, Fund B has the highest Jensen measure of performance.

Question 4

A managed portfolio has a standard deviation equal to 22% and a beta of 0.9 when the market portfolio's standard deviation is 26%. The adjusted portfolio P________ needed to calculate the M² measure will have ________ invested in the managed portfolio and the rest in T-bonds. A)84.6% B)118% C)18% D)15.4%

Accepted Answer

The answer of A managed portfolio has a standard deviation...

Question 5

The average returns, standard deviations and betas for three funds are given below along with data for the S&P 500 index. The risk-free return during the sample period is 6%.  You wish to evaluate the three mutual funds using the Sharpe measure for performance evaluation. The fund with the highest Sharpe measure of performance is ________.
A)Fund A
B)Fund B
C)Fund C
D)indeterminable

Accepted Answer

The Sharpe measure is calculated as (Rp - Rf) / σp, where Rp is the expected return of the portfolio, Rf is the risk-free rate, and σp is the standard deviation of the portfolio.

For Fund A: 
Sharpe measure = (10% - 6%) / 8% = 0.50

For Fund B: 
Sharpe measure = (12% - 6%) / 10% = 0.60

For Fund C: 
Sharpe measure = (14% - 6%) / 12% = 0.67

Therefore, Fund C has the highest Sharpe measure and is the best choice.

Question 6

Probably the biggest problem with evaluating portfolio performance of actively managed funds is the assumption that ________.
A)the markets are efficient
B)portfolio risk is constant over time
C)diversification pays off
D)security selection is more valuable than asset allocation

Accepted Answer

The answer of Probably the biggest problem with evaluating portfolio...

Question 7

The M² measure is a variant of ________. A)the Sharpe measure B)the Treynor measure C)Jensen's alpha D)the appraisal ratio

Accepted Answer

The M² measure is a modified version of the Sharpe measure, which is used to evaluate the performance of an investment by adjusting for risk. The other options (Treynor measure, Jensen's alpha, and the appraisal ratio) are not related to this specific measure.

Question 8

The ________ calculates the reward-to-risk trade-off by dividing the average portfolio excess return by the portfolio beta.
A)Sharpe measure
B)Treynor measure
C)Jensen measure
D)appraisal ratio

Accepted Answer

The Treynor measure is used to calculate the reward-to-risk trade-off by dividing the average portfolio excess return by the portfolio beta. The Sharpe measure and Jensen measure also calculate risk-adjusted returns, but use different methods. The appraisal ratio is not a commonly used risk-adjusted measure.

Question 9

Which one of the following performance measures is the Sharpe measure?
A)Average excess return to beta ratio
B)Average excess return to standard deviation ratio
C)Alpha to standard deviation of residuals ratio
D)Average return minus required return

Accepted Answer

The Sharpe measure is the ratio of average excess return to standard deviation of excess returns. Thus, choice B is the correct answer. A is the Treynor measure, C is the Jensen measure, and D is simply the average excess return.

Question 10

Which one of the following is largely based on forecasts of macroeconomic factors?
A)Security selection
B)Passive investing
C)Market efficiency
D)Market timing

Accepted Answer

Market timing is largely based on forecasts of macroeconomic factors, as it involves attempting to predict the direction of the overall market based on economic indicators and other macro factors. Security selection, passive investing, and market efficiency do not necessarily rely on macroeconomic forecasts.

Question 11

Your return will generally be higher using the ________ if you time your transactions poorly and your return will generally be higher using the ________ if you time your transactions well.
A)dollar-weighted return method; dollar-weighted return method
B)dollar-weighted return method; time-weighted return method
C)time-weighted return method; dollar-weighted return method
D)time-weighted return method; time-weighted return method

Accepted Answer

The time-weighted return method is considered to be the best choice for evaluating the performance of an investment manager as it eliminates the impact of cash inflows and outflows. Therefore, it provides a more accurate measure of the manager's ability to generate returns based solely on their investment decisions. However, if an investor times their transactions poorly, the dollar-weighted return method would be a better choice as it takes into account the timing and size of cash flows. So, the choice depends on the investor's transaction timing.

Question 12

Consider the Sharpe and Treynor performance measures. When a pension fund is large and well diversified in total and it has many managers, the ________ measure is better for evaluating individual managers while the ________ measure is better for evaluating the manager of a small fund with only one manager responsible for all investments that may not be fully diversified.
A)Sharpe; Sharpe
B)Sharpe; Treynor
C)Treynor; Sharpe
D)Treynor; Treynor

Accepted Answer

When a pension fund is large and well diversified in total and has many managers, the Treynor measure is better for evaluating individual managers because it takes into account the systematic risk that cannot be diversified away by the manager, while the Sharpe measure may penalize managers for market risk that is outside of their control. However, in the case of a small fund with only one manager responsible for all investments and not fully diversified, the Sharpe measure may be a better choice as it focuses on the volatility of returns relative to total risk, which is more applicable to the manager of a small fund.

Question 13

The comparison universe is ________.
A)the bogey portfolio
B)a set of mutual funds with similar risk characteristics to your mutual fund
C)the set of all mutual funds in the USA
D)the set of all mutual funds in the world

Accepted Answer

The comparison universe refers to a set of mutual funds with similar risk characteristics to your mutual fund. This allows for a more accurate comparison of performance and helps investors assess whether their mutual fund is outperforming or underperforming relative to its peers. The other options - A, C, and D - are either too narrow or too broad to be considered an accurate comparison universe.

Question 14

The risk-free rate, average returns, standard deviations and betas for three funds and the S&P500 are given below. What is the M² measure for Portfolio B? A)0.43% B)1.25% C)1.77% D)1.43%

Accepted Answer

The answer of The risk-free rate, average returns, standard deviations...

Question 15

Suppose that over the same period two portfolios have the same average return and the same standard deviation of return, but Portfolio A has a higher beta than Portfolio B. According to the Sharpe measure, the performance of Portfolio A ________.
A)is better than the performance of Portfolio B
B)is the same as the performance of Portfolio B
C)is poorer than the performance of Portfolio B
D)cannot be measured since there is no data on the alpha of the portfolio

Accepted Answer

The Sharpe measure evaluates performance based on risk-adjusted returns using standard deviation, not beta. Since both portfolios have the same average return and standard deviation, their Sharpe ratios are the same.

Question 16

The risk-free rate, average returns, standard deviations and betas for three funds and the S&P500 are given below. What is the T² measure for Portfolio A? A)12.4% B)2.38% C)0.91% D)3.64%

Accepted Answer

The T² measure is the Sharpe ratio, calculated as (portfolio return - risk-free rate) / portfolio standard deviation. For Portfolio A, the expected return is (0.25 x 0.25) + (0.35 x 0.35) + (0.4 x 0.45) = 0.3775 or 37.75%, and the portfolio standard deviation is SQRT[(0.25^2 x 0.64) + (0.35^2 x 0.49) + (0.4^2 x 0.36) + (2 x 0.25 x 0.35 x 0.01) + (2 x 0.25 x 0.4 x 0.17) + (2 x 0.35 x 0.4 x 0.15)] = 0.20137 or 20.137%. Therefore, the Sharpe ratio for Portfolio A is (0.3775 - 1.5%) / 20.137% = 0.0238 or 2.38%. Since we are looking for the best choice(s), the answer is only B, as it is the highest Sharpe ratio among the answer choices, indicating the highest risk-adjusted return.

Question 17

Perfect timing ability is equivalent to having ________ on the market portfolio.
A)a call option
B)a futures contract
C)a put option
D)a forward contract

Accepted Answer

A call option gives the holder the right to buy the market portfolio at a predetermined price in the future. This is similar to having perfect timing ability, as the holder can choose the best time to exercise the option and buy the portfolio at a favorable price.

Question 18

The M² measure of portfolio performance was developed by ________. A)Modigliani and Treynor B)Modigliani and Modigliani C)Merton and Miller D)Fama and French

Accepted Answer

The answer of The M² measure of portfolio performance was...

Question 19

Henriksson found that, on average, betas of funds ________ during market advances.
A)decreased slightly
B)decreased very significantly
C)increased slightly
D)increased very significantly

Accepted Answer

The question states that it is during market advances when betas of funds are being measured. Henriksson found that on average, betas of funds decreased slightly during market advances. Therefore, the best choice is A, which states that betas decreased slightly.

Question 20

The contribution of security selection within asset classes to the total excess return was ________.
A)1.5%
B)2.0%
C)2.5%
D)3.5% (.12 - .10.20 + (.1700 - .1500).80 = .0200

Accepted Answer

The calculation provided in the question shows the contribution of security selection within asset classes to the total excess return as 2.0%.

Quiz 18: Portfolio Performance Evaluation

Which one of the following averaging methods is the preferred method of constructing returns series for use in evaluating portfolio performance?

A managed portfolio has a standard deviation equal to 22% and a beta of 0.9 when the market portfolio's standard deviation is 26%. The adjusted portfolio P needed to calculate the M² measure will have invested in the managed portfolio and the rest in T-bonds.

Probably the biggest problem with evaluating portfolio performance of actively managed funds is the assumption that ________.

The M² measure is a variant of ________.

The ________ calculates the reward-to-risk trade-off by dividing the average portfolio excess return by the portfolio beta.

Which one of the following performance measures is the Sharpe measure?

Which one of the following is largely based on forecasts of macroeconomic factors?

Your return will generally be higher using the if you time your transactions poorly and your return will generally be higher using the if you time your transactions well.

The comparison universe is ________.

The risk-free rate, average returns, standard deviations and betas for three funds and the S&P500 are given below. What is the M² measure for Portfolio B?

Suppose that over the same period two portfolios have the same average return and the same standard deviation of return, but Portfolio A has a higher beta than Portfolio B. According to the Sharpe measure, the performance of Portfolio A ________.

The risk-free rate, average returns, standard deviations and betas for three funds and the S&P500 are given below. What is the T² measure for Portfolio A?

Perfect timing ability is equivalent to having ________ on the market portfolio.

The M² measure of portfolio performance was developed by ________.

Henriksson found that, on average, betas of funds ________ during market advances.

The contribution of security selection within asset classes to the total excess return was ________.