Question 1

Suppose two portfolios have the same average return and the same standard deviation of returns, but Aggie Fund has a lower beta than Raider Fund. According to the Treynor measure, the performance of Aggie Fund
A) is better than the performance of Raider Fund.
B) is the same as the performance of Raider Fund.
C) is poorer than the performance of Raider Fund.
D) cannot be measured as there are no data on the alpha of the portfolio.

Accepted Answer

The Treynor Index is a measure of average portfolio returns (in excess of the risk-free return) per unit of unit of systematic risk (as measured by beta).

Question 2

Suppose you purchase 100 shares of GM stock at the beginning of year 1 and purchase another 100 shares at the end of year 1. You sell all 200 shares at the end of year 2. Assume that the price of GM stock is $50 at the beginning of year 1, $55 at the end of year 1, and $65 at the end of year 2. Assume no dividends were paid on GM stock. Your dollar-weighted return on the stock will be ________ your time-weighted return on the stock.
A) higher than
B) the same as
C) less than
D) exactly proportional to
E) More information is necessary to answer this question.

Accepted Answer

In the dollar-weighted return, the stock's performance in the second year, when 200 shares are held, has a greater influence on the overall dollar-weighted return. The time-weighted return ignores the number of shares held.

Question 3

The comparison universe is not
A) a concept found only in astronomy.
B) the set of all mutual funds in the world.
C) the set of all mutual funds in the U.S.
D) a set of mutual funds with similar risk characteristics to your mutual fund.
E) a concept found only in astronomy, the set of all mutual funds in the world, or the set of all mutual funds in the U.S.

Accepted Answer

The comparison universe refers to a specific set of items, entities, or data points that are used as a benchmark or reference to evaluate or compare other items, entities, or data points. It is not exclusive to any single field such as astronomy or limited to mutual funds in the U.S. or globally. Instead, it can be applied in various contexts, including finance, where it might refer to a set of mutual funds with similar risk characteristics for comparison purposes.

Question 4

Suppose two portfolios have the same average return and the same standard deviation of returns, 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 as there are no data on the alpha of the portfolio.
E) None of the options are correct.

Accepted Answer

The Sharpe Index is a measure of average portfolio returns (in excess of the risk-free return) per unit of total risk (as measured by standard deviation).

Question 5

________ developed a popular method for risk-adjusted performance evaluation of mutual funds.
A) Eugene Fama
B) Michael Jensen
C) William Sharpe
D) Jack Treynor
E) Michael Jensen, William Sharpe, and Jack Treynor

Accepted Answer

Michael Jensen, William Sharpe, and Jack Treynor developed popular models for mutual fund performance evaluation.

Question 6

________ did not develop a popular method for risk-adjusted performance evaluation of mutual funds.
A) Eugene Fama
B) Michael Jensen
C) William Sharpe
D) Jack Treynor
E) Eugene Fama and Michael Jensen

Accepted Answer

Michael Jensen, William Sharpe, and Jack Treynor developed popular models for mutual fund performance evaluation.

Question 7

The comparison universe is
A) a concept found only in astronomy.
B) the set of all mutual funds in the world.
C) the set of all mutual funds in the U.S.
D) a set of mutual funds with similar risk characteristics to your mutual fund.
E) None of the options are correct.

Accepted Answer

A mutual fund manager is evaluated against the performance of managers of funds of similar risk characteristics.

Question 8

Suppose two portfolios have the same average return and the same standard deviation of returns, but Buckeye Fund has a higher beta than Husker Fund. According to the Treynor measure, the performance of Buckeye Fund
A) is better than the performance of Husker Fund.
B) is the same as the performance of Husker Fund.
C) is poorer than the performance of Husker Fund.
D) cannot be measured as there are no data on the alpha of the portfolio.
E) None of the options are correct.

Accepted Answer

The Treynor Index is a measure of average portfolio returns (in excess of the risk-free return) per unit of systematic risk (as measured by beta).

Question 9

Suppose two portfolios have the same average return and the same standard deviation of returns, but Aggie Fund has a higher beta than Raider Fund. According to the Treynor measure, the performance of Aggie Fund
A) is better than the performance of Raider Fund.
B) is the same as the performance of Raider Fund.
C) is poorer than the performance of Raider Fund.
D) cannot be measured as there are no data on the alpha of the portfolio.

Accepted Answer

The Treynor Index is a measure of average portfolio returns (in excess of the risk-free return) per unit of systematic risk (as measured by beta).

Question 10

Most professionally managed equity funds generally
A) outperform the S&P 500 Index on both raw and risk-adjusted return measures.
B) underperform the S&P 500 Index on both raw and risk-adjusted return measures.
C) outperform the S&P 500 Index on raw return measures and underperform the S&P 500 Index on 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.
E) match the performance of the S&P 500 Index on both raw and risk-adjusted return measures.

Accepted Answer

Most mutual funds do not consistently, over time, outperform the S&P 500 Index on the basis of either raw or risk-adjusted return measures.

Question 11

Henriksson (1984) found that, on average, betas of funds ________ during market advances.
A) increased very significantly
B) increased slightly
C) decreased slightly
D) decreased very significantly
E) did not change

Accepted Answer

Portfolio betas should have a large value if the market is expected to perform well and a small value if the market is not expected to perform well; thus, these results reflect the poor timing ability of mutual fund managers.

Question 12

Suppose two portfolios have the same average return and the same standard deviation of returns, but Aggie Fund has a higher beta than Raider Fund. According to the Sharpe measure, the performance of Aggie Fund
A) is better than the performance of Raider Fund.
B) is the same as the performance of Raider Fund.
C) is poorer than the performance of Raider Fund.
D) cannot be measured as there are no data on the alpha of the portfolio.
E) None of the options

Accepted Answer

The Sharpe Index is a measure of average portfolio returns (in excess of the risk-free return) per unit of total risk (as measured by standard deviation).

Question 13

Suppose two portfolios have the same average return and the same standard deviation of returns, but Buckeye Fund has a lower beta than Husker Fund. According to the Sharpe measure, the performance of Buckeye Fund
A) is better than the performance of Husker Fund.
B) is the same as the performance of Husker Fund.
C) is poorer than the performance of Husker Fund.
D) cannot be measured as there are no data on the alpha of the portfolio.

Accepted Answer

The Sharpe Index is a measure of average portfolio returns (in excess of the risk-free return) per unit of total risk (as measured by standard deviation).

Question 14

Suppose two portfolios have the same average return and the same standard deviation of returns, but Buckeye Fund has a lower beta than Husker Fund. According to the Treynor measure, the performance of Buckeye Fund
A) is better than the performance of Husker Fund.
B) is the same as the performance of Husker Fund.
C) is poorer than the performance of Husker Fund.
D) cannot be measured as there are no data on the alpha of the portfolio.
E) None of the options are correct.

Accepted Answer

The Treynor Index is a measure of average portfolio returns (in excess of the risk-free return) per unit of systematic risk (as measured by beta).

Question 15

Mutual funds show ________ evidence of serial correlation, and hedge funds show ________ evidence of serial correlation.
A) almost no; almost no
B) almost no; substantial
C) substantial; substantial
D) substantial; almost no
E) modest; modest

Accepted Answer

Mutual funds typically show almost no evidence of serial correlation, which suggests that their returns are largely independent from one period to the next. Hedge funds, on the other hand, often exhibit substantial evidence of serial correlation, indicating that their returns can be more predictable from one period to the next, possibly due to the use of strategies that produce autocorrelated outcomes.

Question 16

Suppose two portfolios have the same average return and the same standard deviation of returns, but portfolio A has a lower beta than portfolio B. According to the Treynor 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 as there are no data on the alpha of the portfolio.
E) None of the options are correct.

Accepted Answer

The Treynor Index is a measure of average portfolio returns (in excess of the risk-free return) per unit of systematic risk (as measured by beta).

Question 17

Morningstar's RAR method
I. is one of the most widely-used performance measures.
II. indicates poor performance by placing up to 5 darts next to the fund's name.
III. computes fund returns adjusted for loads.
IV. computes fund returns adjusted for risk.
V. produces ranking results that are the same as those produced with the Sharpe measure.
A) I, II, and IV
B) I, III, and IV
C) I, IV, and V
D) I, II, IV, and V
E) I, II, III, IV, and V

Accepted Answer

II is incorrect-Morningstar uses up to 5 stars to indicate the quality of performance. V is incorrect because the RAR method produces results that are similar to the Sharpe ratio but not identical.

Question 18

Suppose two portfolios have the same average return and the same standard deviation of returns, but Buckeye Fund has a higher beta than Husker Fund. According to the Sharpe measure, the performance of Buckeye Fund
A) is better than the performance of Husker Fund.
B) is the same as the performance of Husker Fund.
C) is poorer than the performance of Husker Fund.
D) cannot be measured as there are no data on the alpha of the portfolio.

Accepted Answer

The Sharpe Index is a measure of average portfolio returns (in excess of the risk-free return) per unit of total risk (as measured by standard deviation).

Question 19

Suppose two portfolios have the same average return and the same standard deviation of returns, but portfolio A has a higher beta than portfolio B. According to the Treynor 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 as there are no data on the alpha of the portfolio.
E) None of the options are correct.

Accepted Answer

The Treynor Index is a measure of average portfolio returns (in excess of the risk-free return) per unit of systematic risk (as measured by beta).

Question 20

Hedge funds
I. are appropriate as a sole investment vehicle for an investor.
II. should only be added to an already well-diversified portfolio.
III. pose performance-evaluation issues due to nonlinear factor exposures.
IV. have down-market betas that are typically larger than up-market betas.
V. have symmetrical betas.
A) I only
B) II and V
C) I, III, and IV
D) II, III, and IV
E) I, III, and V

Accepted Answer

Hedge funds should only be added to an already well-diversified portfolio, pose performance evaluation issues due to nonlinear factor exposures, and have down-market betas that are typically larger than up-market betas.

Quiz 18: Evaluating Investment Performance

Suppose two portfolios have the same average return and the same standard deviation of returns, but Aggie Fund has a lower beta than Raider Fund. According to the Treynor measure, the performance of Aggie Fund

The comparison universe is not

Suppose two portfolios have the same average return and the same standard deviation of returns, but portfolio A has a higher beta than portfolio B. According to the Sharpe measure, the performance of portfolio A

________ developed a popular method for risk-adjusted performance evaluation of mutual funds.

________ did not develop a popular method for risk-adjusted performance evaluation of mutual funds.

The comparison universe is

Suppose two portfolios have the same average return and the same standard deviation of returns, but Buckeye Fund has a higher beta than Husker Fund. According to the Treynor measure, the performance of Buckeye Fund

Suppose two portfolios have the same average return and the same standard deviation of returns, but Aggie Fund has a higher beta than Raider Fund. According to the Treynor measure, the performance of Aggie Fund

Most professionally managed equity funds generally

Henriksson (1984) found that, on average, betas of funds ________ during market advances.

Suppose two portfolios have the same average return and the same standard deviation of returns, but Aggie Fund has a higher beta than Raider Fund. According to the Sharpe measure, the performance of Aggie Fund

Suppose two portfolios have the same average return and the same standard deviation of returns, but Buckeye Fund has a lower beta than Husker Fund. According to the Sharpe measure, the performance of Buckeye Fund

Suppose two portfolios have the same average return and the same standard deviation of returns, but Buckeye Fund has a lower beta than Husker Fund. According to the Treynor measure, the performance of Buckeye Fund

Mutual funds show evidence of serial correlation, and hedge funds show evidence of serial correlation.

Suppose two portfolios have the same average return and the same standard deviation of returns, but portfolio A has a lower beta than portfolio B. According to the Treynor measure, the performance of portfolio A

Suppose two portfolios have the same average return and the same standard deviation of returns, but Buckeye Fund has a higher beta than Husker Fund. According to the Sharpe measure, the performance of Buckeye Fund

Suppose two portfolios have the same average return and the same standard deviation of returns, but portfolio A has a higher beta than portfolio B. According to the Treynor measure, the performance of portfolio A