Question 1

Discuss the M² measure of performance by answering the following questions.Why is M² better than the Sharpe measure? What measure of risk does M² use? How do you construct a managed portfolio,P,to use in computing the M² measure? What is the formula for M²?Draw a graph that shows how M² would be measured.Be sure to label the axes and all relevant points.

Accepted Answer

The answer of Discuss the M² measure of performance by...

Question 2

A portfolio manager's ranking within a comparison universe may not provide a good measure of performance because

Accepted Answer

A) portfolio returns may not be calculated in the same way. 
B) portfolio durations can vary across managers. 
C) if managers follow a particular style or subgroup,portfolios may not be comparable. 
D) both B and C. 
E) all of the above.

Question 3

Suppose the risk-free return is 6%.The beta of a managed portfolio is 1.5,the alpha is 3%,and the average return is 18%.Based on Jensen's measure of portfolio performance,you would calculate the return on the market portfolio as

Accepted Answer

A) 12% 
B) 14% 
C) 15% 
D) 16% 
E) none of the above

Question 4

The comparison universe is not __________.

Accepted Answer

A) a concept found only in astronomy 
B) the set of all mutual funds in the world 
C) the set of all mutual funds in the U.S. 
D) a set of mutual funds with similar risk characteristics to your mutual fund 
E) A,B,and C

Question 5

The following data are available relating to the performance of Seminole Fund and the market portfolio: $$\begin{array} { | l | l | l | } 
\hline & \text { Seminole } & \text { Market Portfolio } \
\hline \text { Average Return } & 18 \% & 14 \% \
\hline \text { Standard Deviation of Returns } & 30 \% & 22 ^ { \circ } \% \
\hline \text { Beta } & 1.4 & 1.0 \
\hline \text { Residual standard deviation } & 4.0 \% & 0.0 \% \
\hline
\end{array}$$ The risk-free return during the sample period was 6%.
-If you wanted to evaluate the Seminole Fund using the M2 measure,what percent of the adjusted portfolio would need to be invested in T-Bills?

Accepted Answer

A) -36% (borrow) 
B) 50% 
C) 8% 
D) 36% 
E) 27%

Question 6

In a particular year, Razorback Mutual Fund earned a return of 1% by making the following investments in asset classes: $$\begin{array} { | l | l | l | } 
\hline & \text { Weight } & \text { Return } \
\hline \text { Bonds } & 20 \% & 5 \% \
\hline \text { Stocks } & 80 \% & 0 \% \
\hline
\end{array}$$ The return on a bogey portfolio was 2%, calculated from the following information. $$\begin{array} { | l | l | l | } 
\hline & \text { Weight } & \text { Return } \
\hline \text { Bonds (Lehman Brothers Index) } & 50 \% & 5 \% \
\hline \text { Stocks (S\&P 500 Index) } & 50 \% & - 1 \% \
\hline
\end{array}$$
-The contribution of asset allocation across markets to the Razorback Fund's total excess return was __________.

Accepted Answer

A) -1.80% 
B) -1.00% 
C) 0.80% 
D) 1.00% 
E) none of the above

Question 7

You invested $1,000 through your broker three years ago.Your account balance at the beginning of each period is shown in the table below. $$\begin{array} { | l | l | l | } 
\hline \text { Time } & \text { Account Balance } & \text { Annual Return } \
\hline 0 & \$ 1,000 & \text { n.a. } \
\hline 1 & \$ 1,200 & \
\hline 2 & \$ 1,500 & \
\hline 3 & \$ 1,000 & \
\hline
\end{array}$$ - Calculate the annual return for each year.Show your calculations in the table.
- Your broker called to tell you the good news that your average annual return over the three years has been 4%.Where did he get this number?
- At first you are confused.It seems as though the broker must be mistaken because you are no better off than when you started investing three years ago.But then you remember something from your favorite Investments class.Suggest an alternate measure for the average return.Calculate this measure and explain to your broker why it is more appropriate.
- Explain to your broker when it would make sense to use the 4% result that he initially quoted you.

Accepted Answer

The answer of You invested $1,000 through your broker three...

Question 8

Suppose two portfolios have the same average return,the same standard deviation of returns,but Aggie Fund has a higher beta than Raider Fund.According to the Treynor measure,the performance of Aggie Fund

Accepted Answer

A) is better than the performance of Raider Fund. 
B) is the same as the performance of Raider Fund. 
C) is poorer than the performance of Raider Fund. 
D) cannot be measured as there is no data on the alpha of the portfolio. 
E) none of the above is true.

Question 9

You want to evaluate three mutual funds using the information ratio measure for performance evaluation.The risk-free return during the sample period is 6%,and the average return on the market portfolio is 19%.The average returns,residual standard deviations,and betas for the three funds are given below. $$\begin{array} { | l | l | l | l | } 
\hline & \text { Average Return } & \text { Residual Standard Deviation } & \text { Beta } \
\hline \text { Fund A } & 20 \% & 4.00 \% & 0.8 \
\hline \text { Fund B } & 21 \% & 1.25 \% & 1.0 \
\hline \text { Fund C } & 23 \% & 1.20 \% & 1.2 \
\hline
\end{array}$$ The fund with the highest information ratio measure is __________.

Accepted Answer

A) Fund A 
B) Fund B 
C) Fund C 
D) Funds A and B are tied for highest 
E) Funds A and C are tied for highest

Question 10

The following data are available relating to the performance of Long Horn Stock Fund and the market portfolio: $$\begin{array} { | l | l | l | } 
\hline & \text { Long Horn } & \text { Market Portfolio } \
\hline \text { Average Return } & 19 \% & 12 \% \
\hline \text { Standard Deviation of Returns } & 35 \% & 15 \% \
\hline \text { Beta } & 1.5 & 1.0 \
\hline \text { Residual standard deviation } & 3.0 \% & 0.0 \% \
\hline
\end{array}$$ The risk-free return during the sample period was 6%.
-Calculate the information ratio for Long Horn Stock Fund.

Accepted Answer

A) 1.33 
B) 4.00 
C) 8.67 
D) 31.43 
E) 37.14

Question 11

The Value Line Index is an equally weighted geometric average of the returns of about 1,700 firms.The value of an index based on the geometric average returns of 3 stocks where the returns on the 3 stocks during a given period were 32%,5%,and -10%,respectively,is __________.

Accepted Answer

A) 4.3% 
B) 7.6% 
C) 9.0% 
D) 13.4% 
E) 5.0%

Question 12

Morningstar's RAR method
I.is one of the most widely used performance measures.
II.indicates poor performance by placing up to 5 darts next to the fund's name.
III.computes fund returns adjusted for loads.
IV.computes fund returns adjusted for risk.
V.produces ranking results that are the same as those produced with the Sharpe measure.

Accepted Answer

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

Question 13

In a particular year, Aggie Mutual Fund earned a return of 15% by making the following investments in the following asset classes: $$\begin{array} { | l | l | l | } 
\hline & \text { Weight } & \text { Return } \
\hline \text { Bonds } & 10 \% & 6 \% \
\hline \text { Stocks } & 90 \% & 16 \% \
\hline
\end{array}$$ The return on a bogey portfolio was 10%, calculated as follows: $$\begin{array} { | l | l | l | } 
\hline & \text { Weight } & \text { Return } \
\hline \text { Bonds (Lehman Brothers Index) } & 50 \% & 5 \% \
\hline \text { Stocks (S\&P 500 Index) } & 50 \% & 15 \% \
\hline
\end{array}$$
-The total excess return on the Aggie managed portfolio was __________.

Accepted Answer

A) 1% 
B) 3% 
C) 4% 
D) 5% 
E) none of the above

Question 14

Suppose you own two stocks,A and B.In year 1,stock A earns a 2% return and stock B earns a 9% return.In year 2,stock A earns an 18% return and stock B earns an 11% return.__________ has the higher arithmetic average return.

Accepted Answer

A) Stock A 
B) Stock B 
C) The two stocks have the same arithmetic average return 
D) At least three periods are needed to calculate the arithmetic average return 
E) None of the above

Question 15

You want to evaluate three mutual funds using the Sharpe measure for performance evaluation.The risk-free return during the sample period is 5%.The average returns,standard deviations and betas for the three funds are given below,as is the data for the S&P 500 index. $$\begin{array} { | l | l | l | l | } 
\hline & \text { Average Return } & \text { Standard. Deviation } & \text { Beta } \
\hline \text { Fund A } & 23 \% & 30 \% & 1.3 \
\hline \text { Fund B } & 20 \% & 19 \% & 1.2 \
\hline \text { Fund C } & 19 \% & 17 \% & 1.1 \
\hline \text { S\&P 500 } & 18 \% & 15 \% & 1.0 \
\hline
\end{array}$$ The investment with the highest Sharpe measure is __________.

Accepted Answer

A) Fund A 
B) Fund B 
C) Fund C 
D) the index 
E) Funds A and C are tied for highest

Question 16

The following data are available relating to the performance of Monarch Stock Fund and the market portfolio: $$\begin{array} { | l | l | l | } 
\hline & \text { Monarch } & \text { Market Portfolio } \
\hline \text { Average Return } & 16 \% & 12 \% \
\hline \text { Standard Deviation of Returns } & 26 \% & 22 \% \
\hline \text { Beta } & 1.15 & 1.00 \
\hline \text { Residual Standard Deviation } & 1 \% & 0 \% \
\hline
\end{array}$$ The risk-free return during the sample period was 4%.
-Calculate Sharpe's measure of performance for Monarch Stock Fund.

Accepted Answer

A) 1.00% 
B) 46.00% 
C) 44.00% 
D) 50.00% 
E) none of the above

Question 17

Suppose two portfolios have the same average return,the same standard deviation of returns,but portfolio A has a higher beta than portfolio B.According to the Treynor 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 as there is no data on the alpha of the portfolio 
E) none of the above is true.

Question 18

Suppose you purchase one share of the stock of Volatile Engineering Corporation at the beginning of year 1 for $36.At the end of year 1,you receive a $2 dividend,and buy one more share for $30.At the end of year 2,you receive total dividends of $4 (i.e.,$2 for each share),and sell the shares for $36.45 each.The dollar-weighted return on your investment is _______.

Accepted Answer

A) -1.75% 
B) 4.08% 
C) 8.53% 
D) 8.00% 
E) 12.35%

Question 19

The following data are available relating to the performance of Long Horn Stock Fund and the market portfolio: $$\begin{array} { | l | l | l | } 
\hline & \text { Long Horn } & \text { Market Portfolio } \
\hline \text { Average Return } & 19 \% & 12 \% \
\hline \text { Standard Deviation of Returns } & 35 \% & 15 \% \
\hline \text { Beta } & 1.5 & 1.0 \
\hline \text { Residual standard deviation } & 3.0 \% & 0.0 \% \
\hline
\end{array}$$ The risk-free return during the sample period was 6%.
-What is the Treynor measure of performance evaluation for Long Horn Stock Fund?

Accepted Answer

A) 1.33% 
B) 4.00% 
C) 8.67% 
D) 31.43% 
E) 37.14%

Question 20

The following data are available relating to the performance of Monarch Stock Fund and the market portfolio: $$\begin{array} { | l | l | l | } 
\hline & \text { Monarch } & \text { Market Portfolio } \
\hline \text { Average Return } & 16 \% & 12 \% \
\hline \text { Standard Deviation of Returns } & 26 \% & 22 \% \
\hline \text { Beta } & 1.15 & 1.00 \
\hline \text { Residual Standard Deviation } & 1 \% & 0 \% \
\hline
\end{array}$$ The risk-free return during the sample period was 4%.
-What is the information ratio measure of performance evaluation for Monarch Stock Fund?

Accepted Answer

A) 1.00% 
B) 280.00% 
C) 44.00% 
D) 50.00% 
E) none of the above

Exam 24: Portfolio Performance Evaluation