Question 1

Consider the theory of active portfolio management. Shares A and B have the same positive alpha and the same non-systematic risk. Share A has a higher beta than share B. You should want ________ in your active portfolio.

Accepted Answer

A)  equal proportions of Shares A and B
B)  more of Share A than Share B
C)  more of Share B than Share A
D)  more information is needed to answer this question A

Question 2

It is very hard to statistically verify abnormal fund performance because of all except which one of the following?

Accepted Answer

A)  Inevitably some fund managers experience streaks of good performance that may just be due to luck
B)  The noise in realised rates of return is so large as to make it hard to identify abnormal performance in competitive markets
C)  Portfolio composition is rarely stable long enough to identify abnormal performance
D)  Even if successful, there is really not much value to be added by active strategies such as market timing D

Question 3

What is the contribution of security selection to relative performance?

Accepted Answer

A)  -0.15%
B)  0.15%
C)  -0.3%
D)  0.3% A

Question 4

A managed portfolio has a standard deviation equal to 22% and a beta of 0.9 when the market portfolio's standard deviation is 26%. The adjusted portfolio P________ needed to calculate the M2 measure will have ________ invested in the managed portfolio and the rest in T-bonds.

Accepted Answer

A)  84.6%
B)  118%
C)  18%
D)  15.4%

Question 5

In the Treynor-Black model, the weight of each analysed security in the portfolio should be proportional to its ________.

Accepted Answer

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

Question 6

The average returns, standard deviations and betas for three funds are given below along with data for the S&P 500 index. The risk-free return during the sample period is 6%.  You wish to evaluate the three mutual funds using the Treynor measure for performance evaluation. The fund with the highest Treynor measure of performance is ________.

Accepted Answer

A)  Fund A
B)  Fund B
C)  Fund C
D)  indeterminable

Question 7

The portfolio that contains the benchmark asset allocation against which a manager will be measured is often called ________.

Accepted Answer

A)  the bogey portfolio
B)  the Vanguard Index
C)  Jensen's alpha
D)  the Treynor measure

Question 8

Shares A and B have alphas of .01 and betas of .90. Share A has a residual variance of .020 while share B has a residual variance of .016. If Share A represents 2% of an active portfolio, share B should represent ________ of an active portfolio.

Accepted Answer

A)  1.6%
B)  2.0%
C)  2.2%
D)  2.5%

Question 9

A portfolio generates an annual return of 13%, a beta of 0.7 and a standard deviation of 17%. The market index return is 14% and has a standard deviation of 21%. What is the M2 measure of the portfolio if the risk-free rate is 5%?

Accepted Answer

A)  0.58%
B)  0.68%
C)  0.78%
D)  0.88%

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 forward contract

Question 11

The risk-free rate, average returns, standard deviations and betas for three funds and the S&P500 are given below.  What is the T2 measure for Portfolio A?

Accepted Answer

A)  12.4%
B)  2.38%
C)  0.91%
D)  3.64%

Question 12

A portfolio generates an annual return of 17%, a beta of 1.2 and a standard deviation of 19%. The market index return is 12% and has a standard deviation of 16%. What is the M2 measure of the portfolio if the risk-free rate is 4%?

Accepted Answer

A)  2.15%
B)  2.76%
C)  2.94%
D)  3.14%

Question 13

The M2 measure is a variant of ________.

Accepted Answer

A)  the Sharpe measure
B)  the Treynor measure
C)  Jensen's alpha
D)  the appraisal ratio

Question 14

Consider the theory of active portfolio management. Shares A and B have the same beta and the same positive alpha. Share A has higher non-systematic risk than share B. You should want ________ in your active portfolio.

Accepted Answer

A)  equal proportions of shares A and B
B)  more of Share A than Share B
C)  more of Share B than Share A
D)  more information is needed to answer this question

Question 15

Suppose that over the same period two portfolios have the same average return and the same standard deviation of return, but Portfolio A has a higher beta than Portfolio B. According to the Sharpe measure, the performance of Portfolio A ________.

Accepted Answer

A)  is better than the performance of Portfolio B
B)  is the same as the performance of Portfolio B
C)  is poorer than the performance of Portfolio B
D)  cannot be measured since there is no data on the alpha of the portfolio

Question 16

Henriksson found that, on average, betas of funds ________ during market advances.

Accepted Answer

A)  decreased slightly
B)  decreased very significantly
C)  increased slightly
D)  increased very significantly

Question 17

The comparison universe is ________.

Accepted Answer

A)  the bogey portfolio
B)  a set of mutual funds with similar risk characteristics to your mutual fund
C)  the set of all mutual funds in the USA
D)  the set of all mutual funds in the world

Question 18

Portfolio managers Paul Martin and Kevin Krueger each manage $1 000 000 funds. Paul Martin has perfect foresight and the call option value of his perfect foresight is $150 000. Kevin Krueger is an imperfect forecaster and correctly predicts 50% of all bull markets and 70% of all bear markets. The value of Kevin Krueger's imperfect forecasting ability is ________.

Accepted Answer

A)  $30 000
B)  $67 500
C)  $108 750
D)  $217 500

Question 19

A market timing strategy is one where asset allocation in the share market ________ when one forecasts the share market will outperform treasury bonds.

Accepted Answer

A)  decreases
B)  increases
C)  remains the same
D)  may increase or decrease

Question 20

A portfolio generates an annual return of 13%, a beta of 0.7 and a standard deviation of 17%. The market index return is 14% and has a standard deviation of 21%. What is the Treynor measure of the portfolio if the risk-free rate is 5%?

Accepted Answer

A)  .1143
B)  .1233
C)  .1354
D)  .1477

Exam 18: Portfolio Performance Evaluation