Question 1

According to the Treynor-Black model, the weight of a security in the active portfolio depends on the ratio of __________ to __________.

Accepted Answer

A) the degree of mispricing; the nonsystematic risk of the security 
B) the degree of mispricing; the systematic risk of the security 
C) the market sensitivity of the security; the nonsystematic risk of the security 
D) the nonsystematic risk of the security; the systematic risk of the security 
E) the total return on the security; the nonsystematic risk of the security 
A) the degree of mispricing; the nonsystematic risk of the security 
B) the degree of mispricing; the systematic risk of the security 
C) the market sensitivity of the security; the nonsystematic risk of the security 
D) the nonsystematic risk of the security; the systematic risk of the security 
E) the total return on the security; the nonsystematic risk of the security A

Question 2

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. A

Question 3

Consider the Treynor-Black model.The alpha of an active portfolio is 2%.The expected return on the market index is 12%.The variance of the return on the market portfolio is 4%.The nonsystematic variance of the active portfolio is 2%.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) 98.3%. 
C) 47.6%. 
D) 100.0%. 
A) 48.7%. 
B) 98.3%. 
C) 47.6%. 
D) 100.0%. C

Question 4

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

Accepted Answer

A) a call option 
B) a futures contract 
C) a put option 
D) a commodities contract 
A) a call option 
B) a futures contract 
C) a put option 
D) a commodities contract

Question 5

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 6

Passive portfolio management consists of

Accepted Answer

A) market timing. 
B) security analysis. 
C) indexing. 
D) market timing and security analysis. 
E) None of the options 
A) market timing. 
B) security analysis. 
C) indexing. 
D) market timing and security analysis. 
E) None of the options

Question 7

To determine the optimal risky portfolio in the Treynor-Black model, macroeconomic forecasts are used for the _________ and composite forecasts are used for the __________.

Accepted Answer

A) passive index portfolio; active portfolio 
B) active portfolio, passive index portfolio 
C) expected return; standard deviation 
D) expected return ; beta coefficient 
E) alpha coefficient; beta coefficient 
A) passive index portfolio; active portfolio 
B) active portfolio, passive index portfolio 
C) expected return; standard deviation 
D) expected return ; beta coefficient 
E) alpha coefficient; beta coefficient

Question 8

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 
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

Question 9

A purely passive strategy is defined as

Accepted Answer

A) one that uses only index funds. 
B) one that allocates assets in fixed proportions that do not vary with market conditions. 
C) one that is mean-variance efficient. 
D) one that uses only index funds and allocates assets in fixed proportions that do not vary with market conditions. 
E) All of the options 
A) one that uses only index funds. 
B) one that allocates assets in fixed proportions that do not vary with market conditions. 
C) one that is mean-variance efficient. 
D) one that uses only index funds and allocates assets in fixed proportions that do not vary with market conditions. 
E) All of the options

Question 10

Consider the Treynor-Black model.The alpha of an active portfolio is 1%.The expected return on the market index is 11%.The variance of return on the market portfolio is 6%.The nonsystematic variance of the active portfolio is 2%.The risk-free rate of return is 4%.The beta of the active portfolio is 1.1.The optimal proportion to invest in the active portfolio is

Accepted Answer

A) 45%. 
B) 25%. 
C) 50%. 
D) 100%. 
A) 45%. 
B) 25%. 
C) 50%. 
D) 100%.

Question 11

Kane, Marcus, and Trippi (1999) show that the annualized fee that investors should be willing to pay for active management, over and above the fee charged by a passive index fund, depends on I) the investor's coefficient of risk aversion.
II. the value of at-the-money call option on the market portfolio.
III. the value of out-of-the-money call option on the market portfolio.
IV. the precision of the security analyst.
V. the distribution of the squared information ratio of in the universe of securities.

Accepted Answer

A) I, II, and IV 
B) I, III, and V 
C) II, IV, and V 
D) I, IV, and V 
E) II, III, and V 
A) I, II, and IV 
B) I, III, and V 
C) II, IV, and V 
D) I, IV, and V 
E) II, III, and V

Question 12

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 
E) None of the options 
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 
E) None of the options

Question 13

Ideally, clients would like to invest with the portfolio manager who has

Accepted Answer

A) a moderate personal risk-aversion coefficient. 
B) a low personal risk-aversion coefficient. 
C) the highest Sharpe measure. 
D) the highest record of realized returns. 
E) the lowest record of standard deviations. 
A) a moderate personal risk-aversion coefficient. 
B) a low personal risk-aversion coefficient. 
C) the highest Sharpe measure. 
D) the highest record of realized returns. 
E) the lowest record of standard deviations.

Question 14

An active portfolio manager faces a trade-off between I) using the Sharpe measure.
II. using mean-variance analysis.
III. exploiting perceived security mispricings.
IV. holding too much of the risk-free asset.
V. letting a few stocks dominate the portfolio.

Accepted Answer

A) I and II 
B) II and V 
C) III and V 
D) III and IV 
E) II and III 
A) I and II 
B) II and V 
C) III and V 
D) III and IV 
E) II and III

Question 15

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 4%.The nonsystematic variance of the active portfolio is 2%.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 16

If you begin with a ______ and obtain additional data from an experiment you can form a ______.

Accepted Answer

A) posterior distribution; prior distribution 
B) prior distribution; posterior distribution 
C) tight posterior; Bayesian analysis 
D) tight prior; Bayesian analysis 
E) None of the options 
A) posterior distribution; prior distribution 
B) prior distribution; posterior distribution 
C) tight posterior; Bayesian analysis 
D) tight prior; Bayesian analysis 
E) None of the options

Question 17

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 18

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 19

In the Treynor-Black model

Accepted Answer

A) portfolio weights are sensitive to large alpha values which can lead to infeasible long or short positions for many portfolio managers. 
B) portfolio weights are not sensitive to large alpha values which can lead to infeasible long or short positions for many portfolio managers. 
C) portfolio weights are sensitive to large alpha values which can lead to the optimal portfolio for most portfolio managers. 
D) portfolio weights are not sensitive to large alpha values which can lead to the optimal portfolio for most portfolio managers. 
A) portfolio weights are sensitive to large alpha values which can lead to infeasible long or short positions for many portfolio managers. 
B) portfolio weights are not sensitive to large alpha values which can lead to infeasible long or short positions for many portfolio managers. 
C) portfolio weights are sensitive to large alpha values which can lead to the optimal portfolio for most portfolio managers. 
D) portfolio weights are not sensitive to large alpha values which can lead to the optimal portfolio for most portfolio managers.

Question 20

One property of a risky portfolio that combines an active portfolio of mispriced securities with a market portfolio is that, when optimized, its squared Sharpe measure increases by the square of the active portfolio's

Accepted Answer

A) Sharpe ratio. 
B) information ratio. 
C) alpha. 
D) Treynor measure. 
E) None of the options 
A) Sharpe ratio. 
B) information ratio. 
C) alpha. 
D) Treynor measure. 
E) None of the options

Exam 27: The Theory of Active Portfolio Management

According to the Treynor-Black model, the weight of a security in the active portfolio depends on the ratio of __________ to __________.

The Treynor-Black model

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

Passive portfolio management consists of

To determine the optimal risky portfolio in the Treynor-Black model, macroeconomic forecasts are used for the _________ and composite forecasts are used for the __________.

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 ____________.

A purely passive strategy is defined as

The Treynor-Black model assumes that

Ideally, clients would like to invest with the portfolio manager who has

An active portfolio manager faces a trade-off between I) using the Sharpe measure. II. using mean-variance analysis. III. exploiting perceived security mispricings. IV. holding too much of the risk-free asset. V. letting a few stocks dominate the portfolio.

If you begin with a ______ and obtain additional data from an experiment you can form a ______.

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

In the Treynor-Black model

One property of a risky portfolio that combines an active portfolio of mispriced securities with a market portfolio is that, when optimized, its squared Sharpe measure increases by the square of the active portfolio's

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

Optimal Risky Portfolios

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

According to the Treynor-Black model, the weight of a security in the active portfolio depends on the ratio of to .

To determine the optimal risky portfolio in the Treynor-Black model, macroeconomic forecasts are used for the _ and composite forecasts are used for the __.

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 .

If you begin with a and obtain additional data from an experiment you can form a .