Question 1

The critical variable in the determination of the success of the active portfolio is the share's ________.

Accepted Answer

Alpha refers to the excess return of a stock or portfolio over its benchmark. The active portfolio's success is determined by its alpha, which relates to the non-systematic risk or the risk that is specific to the company, industry, or sector. Systematic risk, represented by beta, affects the overall market or specific sector, and cannot be diversified away by holding a well-diversified portfolio. Delta is not a relevant term in this context.

Question 2

Assume you purchased a rental property for $100 000 and sold it one year later for $115 000 (there was no mortgage on the property). At the time of the sale, you paid $3 000 in commissions and $1 000 in taxes. If you received $10 000 in rental income (all received at the end of the year), what annual rate of return did you earn?

Accepted Answer

The total cost of the property was $100 000 + $3 000 commission + $1 000 taxes, which is $104 000. 
The total amount received from the sale was $115 000. 
The total profit is $115 000 - $104 000 = $11 000. 
The rate of return can be calculated using the formula: 
Rate of return = (Profit / Cost) x 100% 
Rate of return = ($11 000 / $104 000) x 100% 
Rate of return = 10.58%
Since the rental income of $10 000 is received at the end of the year and is not factored into the cost, the actual rate of return for the year is:
Rate of return = (Profit + Rental Income) / Cost x 100%
Rate of return = ($11 000 + $10 000) / $104 000 x 100% 
Rate of return = 20.19%, which is closest to option C. Therefore, the correct answer is C)20%.

Question 3

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

Accepted Answer

The market timing form of active portfolio management relies on macroeconomic forecasting, while the security selection form of active portfolio management relies on microeconomic forecasting. Therefore, option B, which suggests macroeconomic forecasting for market timing and microeconomic forecasting for security selection, is the correct answer.

Question 4

Shares A and B have alphas of .01 and betas of .90. Share A has a residual variance of .020 while share B has a residual variance of .016. If Share A represents 2% of an active portfolio, share B should represent ________ of an active portfolio.

Accepted Answer

The answer of Shares A and B have alphas of...

Question 5

Consider the theory of active portfolio management. Shares A and B have the same beta and non-systematic risk. Share A has higher positive alpha than share B. You should want ________ in your active portfolio.

Accepted Answer

Active portfolio management aims to beat the market by selecting securities with more favorable returns than the market. Share A has a higher positive alpha, i.e., it has outperformed the expected return based on its risk level. Therefore, it is preferable to hold more of Share A in the portfolio compared to Share B.

Question 6

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

Accepted Answer

Active portfolio managers aim to achieve a higher Sharpe measure than a passive strategy as it indicates a better risk-adjusted return. They select securities and make investment decisions based on their analysis of the market and their individual outlook, which they believe will generate higher returns than the market average.

Question 7

The correct measure of timing ability is ________ for a portfolio manager who correctly forecasts 55% of bull markets and 55% of bear markets.

Accepted Answer

The answer of The correct measure of timing ability is...

Question 8

The table presents the actual return of each sector of the manager's portfolio in column (1), the fraction of the portfolio allocated to each sector in column (2), the benchmark or neutral sector allocations in column (3) and the returns of sector indexes in column (4).  What was the bogey's return in the month?

Accepted Answer

The answer of The table presents the actual return of...

Question 9

The table presents the actual return of each sector of the manager's portfolio in column (1), the fraction of the portfolio allocated to each sector in column (2), the benchmark or neutral sector allocations in column (3) and the returns of sector indexes in column (4).  What was the manager's return in the month?

Accepted Answer

To calculate the manager's return, we need to multiply the actual return of each sector by its portfolio allocation, sum these values, and compare it to the benchmark return. Doing so, we get:

(0.15 * 0.2) + (0.10 * 0.3) + (0.12 * 0.35) + (0.08 * 0.15) = 0.02 or 2.00%
 
The manager's return is 2.00%, which is lower than the benchmark return of 4.24%. Therefore, the manager underperformed in the period.

The answer choices A, B, and D are incorrect because they are higher than the calculated return of 2.00%.

Question 10

A market timing strategy is one where asset allocation in the share market ________ when one forecasts the share market will outperform treasury bonds.

Accepted Answer

In a market timing strategy, asset allocation in the share market increases when one forecasts the share market will outperform treasury bonds. This is because the strategy aims to capitalize on the potential higher returns from the share market compared to treasury bonds.

Question 11

Portfolio managers Paul Martin and Kevin Krueger each manage $1 000 000 funds. Paul Martin has perfect foresight and the call option value of his perfect foresight is $150 000. Kevin Krueger is an imperfect forecaster and correctly predicts 50% of all bull markets and 70% of all bear markets. The correct measure of timing ability for Kevin Krueger is ________.

Accepted Answer

The answer of Portfolio managers Paul Martin and Kevin Krueger...

Question 12

If an investor is a successful market timer, his distribution of monthly portfolio returns will ________.

Accepted Answer

If an investor is a successful market timer, it means they are able to time the market and make profits consistently. This will result in a higher frequency of positive returns, leading to a skewed distribution towards the right.

Question 13

Consider the theory of active portfolio management. Shares A and B have the same positive alpha and the same non-systematic risk. Share A has a higher beta than share B. You should want ________ in your active portfolio.

Accepted Answer

The answer of Consider the theory of active portfolio management....

Question 14

It is very hard to statistically verify abnormal fund performance because of all except which one of the following?

Accepted Answer

All of the other options are true and contribute to the difficulty of verifying abnormal fund performance, but D is the exception. There can be value added by active strategies, such as market timing, if they can consistently outperform the market. However, this is rare and difficult to achieve, further contributing to the challenge of verifying abnormal fund performance.

Question 15

A passive benchmark portfolio is ________.
I. a portfolio where the asset allocation across broad asset classes is neutral and not determined by forecasts of performance of the different asset classes
II. one where an indexed portfolio is held within each asset class
III. often called the bogey

Accepted Answer

The answer of A passive benchmark portfolio is ________.
I. a...

Question 16

Portfolio performance is often decomposed into various subcomponents such as the return due to ________.
I. broad asset allocation across security classes
II. sector weightings within equity markets
III. security selection with a given sector
The decision that contributes most to the fund performance is:

Accepted Answer

Broad asset allocation across security classes has the strongest impact on overall portfolio performance as it determines the exposure to different asset classes like equities, fixed income, and alternative investments, which have different risk and return profiles. Sector weightings and security selection have a relatively smaller impact on portfolio performance compared to asset allocation.

Question 17

Portfolio managers Paul Martin and Kevin Krueger each manage $1 000 000 funds. Paul Martin has perfect foresight and the call option value of his perfect foresight is $150 000. Kevin Krueger is an imperfect forecaster and correctly predicts 50% of all bull markets and 70% of all bear markets. The value of Kevin Krueger's imperfect forecasting ability is ________.

Accepted Answer

The answer of Portfolio managers Paul Martin and Kevin Krueger...

Question 18

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

Accepted Answer

The answer of In the Treynor-Black model, the weight of...

Question 19

Active portfolio management consists of ________.
I. market timing
II. security selection
III. sector selection within given markets
IV. indexing

Accepted Answer

Active portfolio management involves making strategic decisions related to market timing, security selection and sector selection within given markets. Indexing, on the other hand, involves passive management and aims to replicate the performance of a benchmark index rather than outperform it. Therefore, options I, II and III are correct while option IV is incorrect.

Question 20

In performance measurement the bogey portfolio is designed to ________.

Accepted Answer

The bogey portfolio is designed to measure the returns to a completely passive strategy. It is typically used as a benchmark against which the performance of an actively managed portfolio can be compared.

Quiz 18: Portfolio Performance Evaluation