Question 1

A purely passive strategy

Accepted Answer

A)  uses only index funds. 
B)  uses weights that change in response to market conditions. 
C)  uses only risk-free assets. 
D)  is best if there is "noise" in realized returns. 
E)  is useless if abnormal returns are available. 
A)  uses only index funds. 
B)  uses weights that change in response to market conditions. 
C)  uses only risk-free assets. 
D)  is best if there is "noise" in realized returns. 
E)  is useless if abnormal returns are available.

Question 2

The Treynor-Black model assumes that

Accepted Answer

A)  the objective of security analysis is to form an active portfolio of a limited number of mispriced securities. 
B)  the cost of less than full diversification comes from the nonsystematic risk of the mispriced stock. 
C)  the optimal weight of a mispriced security in the active portfolio is a function of the degree of mispricing, the market sensitivity of the security, and its degree of nonsystematic risk. 
D)  All of the options are correct. 
E)  None of the options are correct. 
A)  the objective of security analysis is to form an active portfolio of a limited number of mispriced securities. 
B)  the cost of less than full diversification comes from the nonsystematic risk of the mispriced stock. 
C)  the optimal weight of a mispriced security in the active portfolio is a function of the degree of mispricing, the market sensitivity of the security, and its degree of nonsystematic risk. 
D)  All of the options are correct. 
E)  None of the options are correct.

Question 3

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

Accepted Answer

A)  a market portfolio. 
B)  a passive portfolio. 
C)  an active portfolio. 
D)  an index portfolio. 
E)  a balanced portfolio. 
A)  a market portfolio. 
B)  a passive portfolio. 
C)  an active portfolio. 
D)  an index portfolio. 
E)  a balanced portfolio.

Question 4

The Black-Litterman model and Treynor-Black model are

Accepted Answer

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 are correct. 
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 are correct.

Question 5

Consider the Treynor-Black model. The alpha of an active portfolio is 3%. The expected return on the market index is 18%. The standard deviation of the return on the market portfolio is 25%. The nonsystematic standard deviation of the active portfolio is 15%. The risk-free rate of return is 6%. The beta of the active portfolio is 1.2. The optimal proportion to invest in the active portfolio is

Accepted Answer

A)  50.0%. 
B)  69.4%. 
C)  72.3%. 
D)  80.6%. 
E)  100.0%. 
A)  50.0%. 
B)  69.4%. 
C)  72.3%. 
D)  80.6%. 
E)  100.0%.

Question 6

Consider these two investment strategies: $\begin{array}{cc}
&  \text {  Strategy1\%} &\text { Strategy2\%} \
 \text { Expected return } &6&9\
 \text { Standard deviation } &0&4\
 \text {Highest return  } &6&15\
 \text {  Lowest return } &6&6\
\end{array}$
 Strategy __________ is the dominant strategy because __________.

Accepted Answer

A)  1; it is riskless 
B)  1; it has the highest reward/risk ratio 
C)  2; its return is greater than or equal to the return of Strategy 1 
D)  2; it has the highest reward/risk ratio 
E)  Both strategies are equally preferred. 
A)  1; it is riskless 
B)  1; it has the highest reward/risk ratio 
C)  2; its return is greater than or equal to the return of Strategy 1 
D)  2; it has the highest reward/risk ratio 
E)  Both strategies are equally preferred.

Question 7

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

Accepted Answer

A)  Black-Litterman 
B)  Treynor-Black 
C)  Treynor-Mazuy 
D)  Black-Scholes 
A)  Black-Litterman 
B)  Treynor-Black 
C)  Treynor-Mazuy 
D)  Black-Scholes

Question 8

Tracking error is defined as

Accepted Answer

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. 
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.

Question 9

The beta of an active portfolio is 1.20. The standard deviation of the returns on the market index is 20%. The nonsystematic variance of the active portfolio is 1%. The standard deviation of the returns on the active portfolio is

Accepted Answer

A)  3.84%. 
B)  5.84%. 
C)  19.60%. 
D)  24.17%. 
E)  26.0%. 
A)  3.84%. 
B)  5.84%. 
C)  19.60%. 
D)  24.17%. 
E)  26.0%.

Question 10

Consider the Treynor-Black model. The alpha of an active portfolio is 2%. The expected return on the market index is 16%. The variance of return on the market portfolio is 4%. The nonsystematic variance of the active portfolio is 1%. The risk-free rate of return is 8%. The beta of the active portfolio is 1. The optimal proportion to invest in the active portfolio is

Accepted Answer

A)  0%. 
B)  25%. 
C)  50%. 
D)  100%. 
A)  0%. 
B)  25%. 
C)  50%. 
D)  100%.

Question 11

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

Accepted Answer

A)  alpha/systematic risk. 
B)  alpha/nonsystematic risk. 
C)  gamma/systematic risk. 
D)  gamma/nonsystematic risk. 
A)  alpha/systematic risk. 
B)  alpha/nonsystematic risk. 
C)  gamma/systematic risk. 
D)  gamma/nonsystematic risk.

Question 12

Benchmark risk

Accepted Answer

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. 
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.

Question 13

Consider the Treynor-Black model. The alpha of an active portfolio is 3%. The expected return on the market index is 10%. The variance of the return on the market portfolio is 0.04. The nonsystematic variance of the active portfolio is 0.02. The risk-free rate of return is 3%. The beta of the active portfolio is 1.15. The optimal proportion to invest in the active portfolio is

Accepted Answer

A)  48.7%. 
B)  98.4%. 
C)  51.3%. 
D)  100.0%. 
A)  48.7%. 
B)  98.4%. 
C)  51.3%. 
D)  100.0%.

Question 14

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

Accepted Answer

A)  Regression analysis 
B)  Exponential smoothing 
C)  ARIMA 
D)  Moving average models 
E)  GAUSS 
A)  Regression analysis 
B)  Exponential smoothing 
C)  ARIMA 
D)  Moving average models 
E)  GAUSS

Question 15

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 ____________.

Accepted Answer

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 are correct. 
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 are correct.

Question 16

Which of the following are not true regarding the Treynor-Black model?

Accepted Answer

A)  It considers both macroeconomic and microeconomic risks. 
B)  It considers security selection only. 
C)  It is nearly impossible to implement. 
D)  It considers both macroeconomic and microeconomic risks, and it is nearly impossible to implement. 
E)  It considers security selection only, and it is nearly impossible to implement. 
A)  It considers both macroeconomic and microeconomic risks. 
B)  It considers security selection only. 
C)  It is nearly impossible to implement. 
D)  It considers both macroeconomic and microeconomic risks, and it is nearly impossible to implement. 
E)  It considers security selection only, and it is nearly impossible to implement.

Question 17

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

Accepted Answer

A)  zero. 
B)  positive. 
C)  negative. 
D)  not zero. 
E)  zero or positive. 
A)  zero. 
B)  positive. 
C)  negative. 
D)  not zero. 
E)  zero or positive.

Question 18

Benchmark risk is defined as

Accepted Answer

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. 
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.

Question 19

Active portfolio managers try to construct a risky portfolio with

Accepted Answer

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. 
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.

Question 20

The Treynor-Black model

Accepted Answer

A)  considers both macroeconomic and microeconomic risks. 
B)  considers security selection only. 
C)  is nearly impossible to implement. 
D)  considers both macroeconomic and microeconomic risks and is nearly impossible to implement. 
E)  considers security selection only and is nearly impossible to implement. 
A)  considers both macroeconomic and microeconomic risks. 
B)  considers security selection only. 
C)  is nearly impossible to implement. 
D)  considers both macroeconomic and microeconomic risks and is nearly impossible to implement. 
E)  considers security selection only and is nearly impossible to implement.

Exam 27: The Theory of Active Portfolio Management

A purely passive strategy

The Treynor-Black model assumes that

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

The Black-Litterman model and Treynor-Black model are

Consider these two investment strategies: Strategy1\% Strategy2\% Expected return 6 9 Standard deviation 0 4 Highest return 6 15 Lowest return 6 6 Strategy __________ is the dominant strategy because __________.

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

Tracking error is defined as

The beta of an active portfolio is 1.20. The standard deviation of the returns on the market index is 20%. The nonsystematic variance of the active portfolio is 1%. The standard deviation of the returns on the active portfolio is

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

Benchmark risk

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

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 ____________.

Which of the following are not true regarding the Treynor-Black model?

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

Benchmark risk is defined as

Active portfolio managers try to construct a risky portfolio with

The Treynor-Black model

The Investment Environment

Asset Classes and Financial Instruments

How Securities Are Traded

Mutual Funds and Other Investment Companies

Risk, Return, and the Historical Record

Capital Allocation to Risky Assets

Efficient Diversification

Index Models

The Capital Asset Pricing Model

Arbitrage Pricing Theory and Multifactor Models of Risk and Return

The Efficient Market Hypothesis

Behavioral Finance and Technical Analysis

Empirical Evidence on Security Returns

Bond Prices and Yields

The Term Structure of Interest Rates

Managing Bond Portfolios

Macroeconomic and Industry Analysis

Equity Valuation Models

Financial Statement Analysis

Options Markets: Introduction

Option Valuation

Futures Markets

Futures, Swaps, and Risk Management

Portfolio Performance Evaluation

International Diversification

Hedge Funds

Investment Policy and the Framework of the Cfa Institute

Filters

Consider these two investment strategies: Strategy1\% Strategy2\% Expected return 6 9 Standard deviation 0 4 Highest return 6 15 Lowest return 6 6 Strategy is the dominant strategy because .

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 .