Question 1

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 2

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 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

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 5

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 6

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 7

Consider these two investment strategies: $$\begin{array} { l c c } 
& \text { Strategy 1(\%) } & \text { Strategy 2(\%) } \
\text { Expected return } & 6 & 9 \
\text { Standard deviation } & 0 & 4 \
\text { Highest return } & 6 & 15 \
\text { Lowest return } & 6 & 6 \
\hline
\end{array}$$ 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 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 8

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 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) some portfolio managers have produced sequences of abnormal returns that are difficult to label as lucky 
E)  All of the options are correct. 
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 
E)  All of the options are correct.

Question 10

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

Question 11

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 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

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 14

The beta of an active portfolio is 1.45. The standard deviation of the returns on the market index is 22%. The nonsystematic variance of the active portfolio is 3%. The standard deviation of the returns on the active portfolio
Is

Accepted Answer

A)  36.30%. 
B)  5.84%. 
C)  19.60%. 
D)  24.17%. 
E)  26.0%. 
A)  36.30%. 
B)  5.84%. 
C)  19.60%. 
D)  24.17%. 
E)  26.0%.

Question 15

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

Question 16

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 17

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 the at-the-money call option on the market portfolio.
III. the value of the 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 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 18

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 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

____________ 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

Exam 27: The Theory of Active Portfolio Management

Tracking error is defined as

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

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

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

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 __________.

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.

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

Active portfolio management consists of

The Black-Litterman model and Treynor-Black model are

The beta of an active portfolio is 1.45. The standard deviation of the returns on the market index is 22%. The nonsystematic variance of the active portfolio is 3%. The standard deviation of the returns on the active portfolio Is

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 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.

The Treynor-Black model assumes that

Active portfolio managers try to construct a risky portfolio with

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

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 .

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 .

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.