Question 1

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 2

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% 
E) none of the above 
A) 48.7% 
B) 98.3% 
C) 47.6% 
D) 100.0% 
E) none of the above

Question 3

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 4

Consider these two investment strategies: $$\begin{array} { | l | l | l | } 
\hline & \text { Strategy 1 } ( \% ) & \text { Strategy 2 } ( \% ) \
\hline \text { Expected return } & 5 & 10 \
\hline \text { Standard deviation } & 0 & 3 \
\hline \text { Highest return } & 6 & 12 \
\hline \text { Lowest return } & 5 & 6 \
\hline
\end{array}$$ 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 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 5

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

Question 6

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

Question 7

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) both A and B. 
E) all of the above. 
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) both A and B. 
E) all of the above.

Question 8

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 above are true. 
E) none of the above are true. 
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 above are true. 
E) none of the above are true.

Question 9

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

Question 10

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

Question 11

The Black-Litterman model is geared toward ____________ while the Treynor-Black model is geared toward ____________.

Accepted Answer

A) security analysis; security analysis 
B) asset allocation; asset allocation 
C) security analysis; asset allocation 
D) asset allocation; security analysis 
E) none of the above 
A) security analysis; security analysis 
B) asset allocation; asset allocation 
C) security analysis; asset allocation 
D) asset allocation; security analysis 
E) none of the above

Question 12

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 
E) none of the above 
A) bias, precision 
B) bias, bias 
C) precision, precision 
D) precision, bias 
E) none of the above

Question 13

Consider these two investment strategies: $$\begin{array} { | l | l | l | } 
\hline & \text { Strategy 1 } ( \% ) & \text { Strategy 2 } ( \% ) \
\hline \text { Expected return } & 6 & 9 \
\hline \text { Standard deviation } & 0 & 4 \
\hline \text { Highest return } & 6 & 15 \
\hline \text { Lowest return } & 6 & 6 \
\hline
\end{array}$$ 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 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 14

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

Question 15

Which of the following are not true regarding 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) A and C. 
E) B and C. 
A) considers both macroeconomic and microeconomic risks. 
B) considers security selection only. 
C) is nearly impossible to implement. 
D) A and C. 
E) B and C.

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 above 
A) posterior distribution; prior distribution 
B) prior distribution; posterior distribution 
C) tight posterior; Bayesian analysis 
D) tight prior; Bayesian analysis 
E) none of the above

Question 17

Active portfolio management consists of __________.

Accepted Answer

A) market timing 
B) security analysis 
C) indexing 
D) A and B 
E) none of the above 
A) market timing 
B) security analysis 
C) indexing 
D) A and B 
E) none of the above

Question 18

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

Question 19

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 above. 
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 above.

Question 20

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

Exam 27: The Theory of Active Portfolio Management

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

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

Consider these two investment strategies: Strategy 1 (\%) Strategy 2 (\%) Expected return 5 10 Standard deviation 0 3 Highest return 6 12 Lowest return 5 6 Strategy __________ is the dominant strategy because __________.

The Treynor-Black model

A purely passive strategy is defined as

The Treynor-Black model assumes that

Benchmark risk is defined as

Benchmark risk

The Black-Litterman model is geared toward ____________ while the Treynor-Black model is geared toward ____________.

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.

Consider these two investment strategies: Strategy 1 (\%) Strategy 2 (\%) Expected return 6 9 Standard deviation 0 4 Highest return 6 15 Lowest return 6 6 Strategy __________ is the dominant strategy because __________.

The Treynor-Black model does not assume that

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

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

Active portfolio management consists of __________.

In the Treynor-Black model

The Black-Litterman model and Treynor-Black model are

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

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

Consider these two investment strategies: Strategy 1 (\%) Strategy 2 (\%) Expected return 5 10 Standard deviation 0 3 Highest return 6 12 Lowest return 5 6 Strategy is the dominant strategy because .

The Black-Litterman model is geared toward while the Treynor-Black model is geared toward .

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.

Consider these two investment strategies: Strategy 1 (\%) Strategy 2 (\%) Expected return 6 9 Standard deviation 0 4 Highest return 6 15 Lowest return 6 6 Strategy is the dominant strategy because .

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