Question 1

The tracking error of an optimized portfolio can be expressed in terms of the ____________ of the portfolio and thus reveals ____________.

Accepted Answer

A) return; portfolio performance 
B) total risk; portfolio performance 
C) beta; portfolio performance 
D) beta; benchmark risk 
E) relative return; benchmark risk 
A) return; portfolio performance 
B) total risk; portfolio performance 
C) beta; portfolio performance 
D) beta; benchmark risk 
E) relative return; benchmark risk D

Question 2

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% E

Question 3

The Treynor-Black model requires estimates of ________.

Accepted Answer

A) alpha/beta 
B) alpha/beta/residual variance 
C) beta/residual variance 
D) alpha/residual variance 
E) none of the above 
A) alpha/beta 
B) alpha/beta/residual variance 
C) beta/residual variance 
D) alpha/residual variance 
E) none of the above B

Question 4

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 
E) none of the above 
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 
E) none of the above

Question 5

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

Accepted Answer

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

Question 6

An active portfolio manager faces a tradeoff 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 7

Discuss the Treynor-Black model.

Accepted Answer

The Treynor-Black estimates the alpha, b

Question 8

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 9

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) A and B. 
E) A,B,and C. 
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) A and B. 
E) A,B,and C.

Question 10

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 
E) none of the above 
A) a call option 
B) a futures contract 
C) a put option 
D) a commodities contract 
E) none of the above

Question 11

____________ 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 12

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 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

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 above. 
A) Sharpe ratio. 
B) information ratio. 
C) alpha. 
D) Treynor measure. 
E) none of the above.

Question 15

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 16

The beta of an active portfolio is 1.36.The standard deviation of the returns on the market index is 22%.The nonsystematic variance of the active portfolio is 1.2%.The standard deviation of the returns on the active portfolio is __________.

Accepted Answer

A) 3.19% 
B) 31.86% 
C) 42.00% 
D) 27.57% 
E) 2.86% 
A) 3.19% 
B) 31.86% 
C) 42.00% 
D) 27.57% 
E) 2.86%

Question 17

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% 
E) none of the above 
A) 0% 
B) 25% 
C) 50% 
D) 100% 
E) none of the above

Question 18

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

Question 19

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 20

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 
E) none of the above. 
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 
E) none of the above.

Exam 27: The Theory of Active Portfolio Management

The tracking error of an optimized portfolio can be expressed in terms of the ____________ of the portfolio and thus reveals ____________.

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 Treynor-Black model requires estimates of ________.

Active portfolio managers try to construct a risky portfolio with __________.

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

An active portfolio manager faces a tradeoff 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.

Discuss the Treynor-Black model.

A purely passive strategy

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

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

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

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

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

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

The beta of an active portfolio is 1.36.The standard deviation of the returns on the market index is 22%.The nonsystematic variance of the active portfolio is 1.2%.The standard deviation of the returns on the active portfolio is __________.

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

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.

Tracking error is defined as

The Investment Environment

Asset Classes and Financial Instruments

How Securities are Traded

Mutual Funds and Other Investment Companies

Introduction to Risk,return,and the Historical Record

Risk Aversion and 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

Options Markets: Introduction

Option Valuation

Futures Markets

Futures, swaps, and Risk Management

Macroeconomic and Industry Analysis

Equity Valuation Models

Financial Statement Analysis

Portfolio Performance Evaluation

International Diversification

Hedge Funds

Investment Policy and the Framework of the CFA Institute Appendices

Filters

The tracking error of an optimized portfolio can be expressed in terms of the of the portfolio and thus reveals .

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

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