Question 1

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, the individual managers' performance can be evaluated using the Treynor performance measure. However, if the fund has only one manager responsible for all investments and may not be fully diversified, the Sharpe performance measure is better suited for evaluating the manager's performance. Therefore, the best choice is Treynor for individual managers in large diversified funds, and Sharpe for managers of small funds with only one manager responsible for all investments.

Question 2

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 U.S.A.
D) the set of all mutual funds in the world

Accepted Answer

The comparison universe should be a set of mutual funds with similar risk characteristics to your mutual fund in order to create an appropriate benchmark for evaluating its performance. A bogey portfolio may not match the characteristics of your mutual fund, and using the set of all mutual funds in the U.S.A. or world may not be relevant for your specific fund.

Question 3

The risk free rate, average returns, standard deviations and betas for three funds and the S&P500 are given below. 
-Based on the example used in the book,a perfect market timer would have made _______ of dollars on a $1 investment between 1926 and 2008.
A) $100
B) $1,626
C) $1.5 million
D) $36.7 billion

Accepted Answer

The perfect market timer would have been able to perfectly time the market and earn the risk free rate when the market was down and earn the average return when the market was up. This would result in enormous profits over time. According to the book, a perfect market timer would have earned $36.7 billion on a $1 investment between 1926 and 2008.

Question 4

In a particular year, Salmon Arm Mutual Fund earned a return of 16% by making the following investments in asset classes:  The return on a bogey portfolio was 12% calculated as follows: 
-The total excess return on the managed portfolio was __________.
A) 2%
B) 3%
C) 4%
D) 5%

Accepted Answer

Excess Return = Managed Portfolio Return - Bogey Portfolio Return
Excess Return = 16% - 12%
Excess Return = 4%

Therefore, the total excess return on the managed portfolio was 4%, which is option C.

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 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

The answer of The average returns, standard deviations and betas...

Question 6

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 need to use the formula: Jensen Measure (J) = Actual Return - [Risk-free rate + Beta * (Market Return - Risk-free Rate)].

Calculating the Jensen measure for each of the funds and the S&P 500:
Jensen Measure for Fund A = 15% - [6% + 1.2 * (10% - 6%)] = 9.6%
Jensen Measure for Fund B = 18% - [6% + 1.5 * (10% - 6%)] = 12%
Jensen Measure for Fund C = 12% - [6% + 0.8 * (10% - 6%)] = 7.2%
Jensen Measure for S&P 500 = 10% - [6% + 1 * (10% - 6%)] = 8%

Therefore, Fund B has the highest Jensen measure of 12% and is the best choice.

Question 7

Most professionally managed equity funds __________.
A) outperform the S&P 500 index on both raw and risk-adjusted return measures
B) outperform the S&P 500 index on raw return measures and underperform the S&P 500 index on risk-adjusted return measures
C) underperform the S&P 500 index on both raw and risk-adjusted return measures
D) underperform the S&P 500 index on raw return measures and outperform the S&P 500 index on risk-adjusted return measures

Accepted Answer

Studies have shown that most professionally managed equity funds tend to underperform the S&P 500 index on both raw and risk-adjusted return measures over the long term. One reason for this is the higher fees and expenses that come with actively managed funds, which can eat into returns. Additionally, the S&P 500 is a broad-based index that captures the performance of many different sectors and companies, which can be difficult for individual fund managers to replicate consistently. While there are some actively managed funds that may outperform the index in the short term, sustained outperformance over time is rare.

Question 8

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-bills. A) 84.6% B) 118% C) 18% D) 15.4%

Accepted Answer

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

Question 9

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 the best choice for comparing the performance of investment managers because it measures the compound rate of growth in your portfolio assuming that you invested all of your money at the beginning of the period and left it there. This method is less affected by the timing and size of cash flows, making it useful for evaluating investment performance. Therefore, if you time your transactions well (i.e., you invest all your money at the beginning and leave it for a while), you will get a higher return using the time-weighted return method. On the other hand, if you time your transactions poorly (i.e., you invest and withdraw money frequently), you run the risk of getting a lower return using the time-weighted return method. In such a case, the dollar-weighted return method may be more appropriate as it considers the impact of cash flows on your investments.

Question 10

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 calculated as the average excess return to standard deviation ratio. This measures the excess return an investor receives per unit of risk, with risk measured as standard deviation.

Question 11

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, also known as the Treynor ratio, is calculated by dividing the excess return of the portfolio over the risk-free rate by the portfolio's beta. The correct value based on the given options is 2.38%.

Question 12

The risk free rate, average returns, standard deviations and betas for three funds and the S&P500 are given below. 
-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 13

Suppose that over the same time 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 answer of Suppose that over the same time period...

Question 14

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 answer of The average returns, standard deviations and betas...

Question 15

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

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

Question 16

A mutual fund with a beta of 1.1 has outperformed the S&P500 over the last 20 years.We know that this mutual fund manager _______________________.
A) must have had superior stock selection ability
B) must have had superior asset allocation ability
C) must have had superior timing ability
D) may or may not have outperformed the S&P500 on a risk adjusted basis

Accepted Answer

The fact that the mutual fund has a beta of 1.1 means that it is slightly more volatile than the overall market (S&P500). Therefore, it is possible that the higher returns are due to simply taking on more risk rather than superior stock selection, asset allocation or timing ability. It is also important to consider risk-adjusted returns when comparing performance. Therefore, it is possible that the mutual fund may not have outperformed the S&P500 on a risk-adjusted basis.

Question 17

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...

Question 18

The risk free rate, average returns, standard deviations and betas for three funds and the S&P500 are given below. 
-If these portfolios are subcomponents which make up part of a well diversified portfolio then portfolio ______ is preferred.
A) A
B) B
C) C
D) S&P500

Accepted Answer

Portfolio B is preferred as it is a subcomponent of a well-diversified portfolio, which suggests it contributes to diversification and potentially reduces risk.

Question 19

The risk free rate, average returns, standard deviations and betas for three funds and the S&P500 are given below. -Based on the M² measure,portfolio C has a superior return of _____ as compared to the S&P500. A) -1.33% B) 1.43% C) 2.00% D) 0.00%

Accepted Answer

To calculate the M² measure, we first calculate the excess return of each fund and the S&P500 over the risk-free rate (3.5% in this case). Excess return = Average return - Risk-free rate Then, we calculate the portfolio excess return and portfolio beta using the weighted average of each fund's excess return and beta. Portfolio excess return = Weighted average of fund excess returns Portfolio beta = Weighted average of fund betas Finally, we calculate the M² measure using the following formula: M² = Portfolio excess return - (Portfolio beta * (S&P500 return - Risk-free rate)) Using this formula, we get: Portfolio A: M² = -1.50% Portfolio B: M² = 0.00% Portfolio C: M² = 2.00% Therefore, the correct answer is C) 2.00%, as portfolio C has a superior return of 2.00% compared to the S&P500 after adjusting for risk.

Question 20

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 not a commonly used measure in finance, but it does resemble the Sharpe measure in terms of its use of risk-adjusted returns. Therefore, A is the best choice.

Quiz 18: Portfolio Performance Evaluation

The comparison universe is __________.

The risk free rate, average returns, standard deviations and betas for three funds and the S&P500 are given below. -Based on the example used in the book,a perfect market timer would have made _______ of dollars on a $1 investment between 1926 and 2008.

In a particular year, Salmon Arm Mutual Fund earned a return of 16% by making the following investments in asset classes: The return on a bogey portfolio was 12% calculated as follows: -The total excess return on the managed portfolio was __________.

Most professionally managed equity funds __________.

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-bills.

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.

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

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?

The risk free rate, average returns, standard deviations and betas for three funds and the S&P500 are given below. -Which one of the following is largely based on forecasts of macroeconomic factors?

Suppose that over the same time 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 __________.

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

A mutual fund with a beta of 1.1 has outperformed the S&P500 over the last 20 years.We know that this mutual fund manager _______________________.

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?

The risk free rate, average returns, standard deviations and betas for three funds and the S&P500 are given below. -If these portfolios are subcomponents which make up part of a well diversified portfolio then portfolio ______ is preferred.

The risk free rate, average returns, standard deviations and betas for three funds and the S&P500 are given below. -Based on the M² measure,portfolio C has a superior return of _____ as compared to the S&P500.

The M² measure is a variant of ________________.