Question 1

The ____________ model allows the private views of the portfolio manager to be incorporated with market data in the optimization procedure.

Accepted Answer

A) Black-Litterman 
B) Treynor-Black 
C) Treynor-Mazuy 
D) Black-Scholes 
A) Black-Litterman 
B) Treynor-Black 
C) Treynor-Mazuy 
D) Black-Scholes

Question 2

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 
A) posterior distribution; prior distribution 
B) prior distribution; posterior distribution 
C) tight posterior; Bayesian analysis 
D) tight prior; Bayesian analysis

Question 3

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 4

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 5

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 6

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

Question 7

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 8

Consider the Treynor-Black model.The alpha of an active portfolio is 3%.The expected return on the market index is 10%.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) 98.4%. 
C) 51.3%. 
D) 100.0%. 
A) 48.7%. 
B) 98.4%. 
C) 51.3%. 
D) 100.0%.

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. 
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.

Question 10

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. 
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.

Question 11

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

Question 12

____________ 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 
A) Regression analysis 
B) Exponential smoothing 
C) ARIMA 
D) Moving average models

Question 13

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. 
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.

Question 14

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%. 
A) 3.19%. 
B) 31.86%. 
C) 42.00%. 
D) 27.57%.

Question 15

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 outcomes, and 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. 
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 outcomes, and 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. 
E) All of the options are correct.

Question 16

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

Accepted Answer

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

Question 17

Consider these two investment strategies:   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 
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

Question 18

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%.

Question 19

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) one that uses only index funds and allocates assets in fixed proportions that do not vary with market conditions. 
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) one that uses only index funds and allocates assets in fixed proportions that do not vary with market conditions.

Question 20

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%. 
A) 50.0%. 
B) 69.4%. 
C) 72.3%. 
D) 80.6%.

Exam 27: The Theory of Active Portfolio Management

The ____________ model allows the private views of the portfolio manager to be incorporated with market data in the optimization procedure.

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

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.

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.

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

Benchmark risk is defined as

The Treynor-Black model does not assume that

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

The Treynor-Black model assumes that

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

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

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

Consider these two investment strategies: Strategy __________ is the dominant strategy because __________.

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

A purely passive strategy is defined as

The Investment Environment

Financial Markets, 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

Behavioural 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

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

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 is the dominant strategy because .