Question 1

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 2

Even low-quality forecasts have proven to be valuable because R-squares of only ____________ in regressions of analysts' forecasts can be used to substantially improve portfolio performance.

Accepted Answer

A) 0.656 
B) 0.452 
C) 0.258 
D) 0.153 
E) 0.001 
A) 0.656 
B) 0.452 
C) 0.258 
D) 0.153 
E) 0.001

Question 3

____________ 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 4

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 5

The Treynor-Black model does not assume 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) indexing is always optimal. 
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) indexing is always optimal.

Question 6

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 
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

Question 7

Consider these two investment strategies:   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 at least equal to Strategy 1 and sometimes greater 
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 at least equal to Strategy 1 and sometimes greater 
D) 2; it has the highest reward/risk ratio 
E) Both strategies are equally preferred.

Question 8

If a portfolio manager consistently obtains a high Sharpe measure, the manager's forecasting ability

Accepted Answer

A) is above average. 
B) is average. 
C) is below average. 
D) does not exist. 
E) cannot be determined based on the Sharpe measure. 
A) is above average. 
B) is average. 
C) is below average. 
D) does not exist. 
E) cannot be determined based on the Sharpe measure.

Question 9

Active 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 10

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 11

Discuss the Treynor-Black model.

Accepted Answer

The Treynor-Black estimates the alpha, b

Question 12

Consider these two investment strategies:   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 at least equal to Strategy 1 and sometimes greater 
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 at least equal to Strategy 1 and sometimes greater 
D) 2; it has the highest reward/risk ratio 
E) Both strategies are equally preferred.

Question 13

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 14

To improve future analyst forecasts using the statistical properties of past forecasts, a regression model can be fitted to past forecasts.The intercept of the regression is a __________ coefficient, and the regression beta represents a __________ coefficient.

Accepted Answer

A) bias; precision 
B) bias; bias 
C) precision; precision 
D) precision; bias 
A) bias; precision 
B) bias; bias 
C) precision; precision 
D) precision; bias

Question 15

There appears to be a role for a theory of active portfolio management because

Accepted Answer

A) some portfolio managers have produced sequences of abnormal returns that are difficult to label as lucky outcomes. 
B) the "noise" in the realized returns is enough to prevent the rejection of the hypothesis that some money managers have outperformed a passive strategy by a statistically small, yet economic, margin. 
C) some anomalies in realized returns have been persistent enough to suggest that portfolio managers who identified these anomalies in a timely fashion could have outperformed a passive strategy over prolonged periods. 
D) some portfolio managers have produced sequences of abnormal returns that are difficult to label as lucky outcomes and the "noise" in the realized returns is enough to prevent the rejection of the hypothesis that some money managers have outperformed a passive strategy by a statistically small, yet economic, margin. 
E) All of the options 
A) some portfolio managers have produced sequences of abnormal returns that are difficult to label as lucky outcomes. 
B) the "noise" in the realized returns is enough to prevent the rejection of the hypothesis that some money managers have outperformed a passive strategy by a statistically small, yet economic, margin. 
C) some anomalies in realized returns have been persistent enough to suggest that portfolio managers who identified these anomalies in a timely fashion could have outperformed a passive strategy over prolonged periods. 
D) some portfolio managers have produced sequences of abnormal returns that are difficult to label as lucky outcomes and the "noise" in the realized returns is enough to prevent the rejection of the hypothesis that some money managers have outperformed a passive strategy by a statistically small, yet economic, margin. 
E) All of the options

Question 16

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, does not depend 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) II, III, and V 
C) II and III 
D) I, IV, and V 
E) II, IV, and V 
A) I, II, and IV 
B) II, III, and V 
C) II and III 
D) I, IV, and V 
E) II, IV, and V

Question 17

A manager who uses the mean-variance theory to construct an optimal portfolio will satisfy

Accepted Answer

A) investors with low risk-aversion coefficients. 
B) investors with high risk-aversion coefficients. 
C) investors with moderate risk-aversion coefficients. 
D) all investors, regardless of their level of risk aversion. 
E) only clients with whom she has established long-term relationships, because she knows their personal preferences. 
A) investors with low risk-aversion coefficients. 
B) investors with high risk-aversion coefficients. 
C) investors with moderate risk-aversion coefficients. 
D) all investors, regardless of their level of risk aversion. 
E) only clients with whom she has established long-term relationships, because she knows their personal preferences.

Question 18

Consider the Treynor-Black model.The alpha of an active portfolio is 1%.The expected return on the market index is 16%.The variance of the 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 1.05.The optimal proportion to invest in the active portfolio is

Accepted Answer

A) 48.7%. 
B) 50.0%. 
C) 51.3%. 
D) 100.0%. 
A) 48.7%. 
B) 50.0%. 
C) 51.3%. 
D) 100.0%.

Question 19

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 20

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

Exam 27: The Theory of Active Portfolio Management

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

Even low-quality forecasts have proven to be valuable because R-squares of only ____________ in regressions of analysts' forecasts can be used to substantially improve portfolio performance.

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

Benchmark risk

The Treynor-Black model does not assume that

The Black-Litterman model and Treynor-Black model are

Consider these two investment strategies: Strategy __________ is the dominant strategy because __________.

If a portfolio manager consistently obtains a high Sharpe measure, the manager's forecasting ability

Active portfolio management consists of

Tracking error is defined as

Discuss the Treynor-Black model.

Consider these two investment strategies: Strategy __________ is the dominant strategy because __________.

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

To improve future analyst forecasts using the statistical properties of past forecasts, a regression model can be fitted to past forecasts.The intercept of the regression is a __________ coefficient, and the regression beta represents a __________ coefficient.

There appears to be a role for a theory of active portfolio management because

A manager who uses the mean-variance theory to construct an optimal portfolio will satisfy

Benchmark risk is defined as

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

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

Consider these two investment strategies: Strategy is the dominant strategy because .

Consider these two investment strategies: Strategy is the dominant strategy because .

To improve future analyst forecasts using the statistical properties of past forecasts, a regression model can be fitted to past forecasts.The intercept of the regression is a coefficient, and the regression beta represents a coefficient.