Question 1

You are comparing three assets which have differing Treynor ratios. Given this, which one of the following must be true?

Accepted Answer

A) The assets may all be correctly priced if they have differing betas. 
B) The assets have differing rates of return. 
C) The assets have differing levels of market risk but equal amounts of total risk. 
D) The assets are all mispriced according to CAPM. 
E) The preferred investment is the asset with the highest Treynor ratio. 
A) The assets may all be correctly priced if they have differing betas. 
B) The assets have differing rates of return. 
C) The assets have differing levels of market risk but equal amounts of total risk. 
D) The assets are all mispriced according to CAPM. 
E) The preferred investment is the asset with the highest Treynor ratio.

Question 2

High Mountain Homes has an expected annual return of 16.1% and a standard deviation of 20.3%. What is the smallest expected loss over the next month given a probability of 2.5%?

Accepted Answer

A) 6.64% 
B) 8.67% 
C) 10.14% 
D) 12.12% 
E) 15.13% 
A) 6.64% 
B) 8.67% 
C) 10.14% 
D) 12.12% 
E) 15.13%

Question 3

A portfolio has a 2.0% chance of losing 15% or more according to the VaR when T = 1. This can be interpreted to mean that the portfolio is expected to have an annual loss of 15% or more once in every how many years?

Accepted Answer

A) 1 
B) 2 
C) 25 
D) 50 
E) 100 
A) 1 
B) 2 
C) 25 
D) 50 
E) 100

Question 4

Your portfolio has an expected return of 12.9%, a beta of 1.52, and a standard deviation of 19.4%. The U.S. Treasury bill rate is 1.35%. What is the Sharpe ratio of your portfolio?

Accepted Answer

A) .595 
B) .673 
C) .700 
D) .773 
E) .838 
A) .595 
B) .673 
C) .700 
D) .773 
E) .838

Question 5

Which one of the following statements is correct in relation to a security that has a negative Jensen's alpha?

Accepted Answer

A) The security is overpriced and will plot below the security market line. 
B) The security is overpriced and will plot above the security market line. 
C) The security is underpriced and will plot below the security market line. 
D) The security is underpriced and will plot above the security market line. 
E) The security is incorrectly priced but you cannot tell if it is underpriced or overpriced based on the information provided. 
A) The security is overpriced and will plot below the security market line. 
B) The security is overpriced and will plot above the security market line. 
C) The security is underpriced and will plot below the security market line. 
D) The security is underpriced and will plot above the security market line. 
E) The security is incorrectly priced but you cannot tell if it is underpriced or overpriced based on the information provided.

Question 6

A fund has an alpha of .89% and a tracking error of 3.8%. What is the fund's information ratio?

Accepted Answer

A) .112 
B) .135 
C) .149 
D) .212 
E) .234 
A) .112 
B) .135 
C) .149 
D) .212 
E) .234

Question 7

Which of the following should generally only be used to evaluate relatively diversified portfolios rather than individual securities?
I. Sharpe ratio
II. Treynor ratio
III. Jensen's alpha

Accepted Answer

A) I only 
B) II only 
C) III only 
D) I and II only 
E) I, II, and III 
A) I only 
B) II only 
C) III only 
D) I and II only 
E) I, II, and III

Question 8

The U.S. Treasury bill is yielding 1.0% and the market has an expected return of 14.5%. What is the Treynor ratio of a correctly valued portfolio that has a beta of 1.26 and a standard deviation of 11.1%?

Accepted Answer

A) .054 
B) .086 
C) .135 
D) .193 
E) .239 
A) .054 
B) .086 
C) .135 
D) .193 
E) .239

Question 9

What is Jensen's alpha of a portfolio comprised of 40% Portfolio A and 60% of Portfolio B?
$$\begin{array} { c c c r } 
\text { Portfolio } & \text { Average Return } & \text { Standard Deviation } & \text { Beta } \
\text { A } & 16.3\% & 21.5\% & 1.58 \
\text {B } & 11.1 & 10.6 & 1.15
\end{array}$$

The risk-free rate is 1.8% and the market risk premium is 5.3%.

Accepted Answer

A) 1.25% 
B) 2.47% 
C) 3.08% 
D) 4.37% 
E) 5.38% 
A) 1.25% 
B) 2.47% 
C) 3.08% 
D) 4.37% 
E) 5.38%

Question 10

Which of the following are related to VaR analysis?
I. beta
II. standard deviation
III. expected return
IV. time

Accepted Answer

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

Question 11

The Jensen-Treynor alpha is equal to:

Accepted Answer

A) the Treynor ratio divided by Jensen's alpha. 
B) the Treynor ratio multiplied by Jensen's alpha. 
C) Jensen's alpha divided by beta. 
D) Jensen's alpha divided by the standard deviation. 
E) Jensen's alpha divided by the Treynor ratio. 
A) the Treynor ratio divided by Jensen's alpha. 
B) the Treynor ratio multiplied by Jensen's alpha. 
C) Jensen's alpha divided by beta. 
D) Jensen's alpha divided by the standard deviation. 
E) Jensen's alpha divided by the Treynor ratio.

Question 12

Which one of the following concerns a money manager's control over investment risks, particularly potential short-run losses?

Accepted Answer

A) Alpha management 
B) Normal distribution management 
C) Investment risk management 
D) Raw return distributions 
E) Volatility performance measures 
A) Alpha management 
B) Normal distribution management 
C) Investment risk management 
D) Raw return distributions 
E) Volatility performance measures

Question 13

A portfolio has a beta of 1.42 and an actual return of 13.5%. The risk-free rate is 1.5% and the market risk premium is 7.4%. What is the value of Jensen's alpha?

Accepted Answer

A) −.93% 
B) 1.05% 
C) 1.32% 
D) 1.49% 
E) 1.69% 
A) −.93% 
B) 1.05% 
C) 1.32% 
D) 1.49% 
E) 1.69%

Question 14

A portfolio has an average return of 9.9%, a standard deviation of 12.3%, and a beta of 1.23. The risk-free rate is 1.9%. What is the Sharpe ratio?

Accepted Answer

A) .593 
B) .650 
C) .679 
D) .713 
E) .756 
A) .593 
B) .650 
C) .679 
D) .713 
E) .756

Question 15

You are comparing three securities and discover they all have identical Treynor ratios. Given this information, which one of the following must be true regarding these three securities?

Accepted Answer

A) They have identical betas. 
B) They have the same rates of return. 
C) They earn identical rewards per unit of total risk. 
D) They earn identical rewards per unit of systematic risk. 
E) They have identical Sharpe ratios also. 
A) They have identical betas. 
B) They have the same rates of return. 
C) They earn identical rewards per unit of total risk. 
D) They earn identical rewards per unit of systematic risk. 
E) They have identical Sharpe ratios also.

Question 16

What is the Treynor ratio of a portfolio comprised of 45% Portfolio A and 55% Portfolio B?
$\begin{array}{lrr}
&\text{A}&\text{B}\
\text { Neight } & 45 \% & 55\% \
\text { Avg Return } & 13.60 \% & 8.40 \% \
\text { Std Dev } & 17.20 \% & 6.40 \%\
\text{Beta}&1.38&0.87
\end{array}$

The risk-free rate is 3.12% and the market risk premium is 8.5%.

Accepted Answer

A) .041 
B) .058 
C) .069 
D) .114 
E) .136 
A) .041 
B) .058 
C) .069 
D) .114 
E) .136

Question 17

Your portfolio has a standard deviation of 12.3% and an average return of 9.6%. You have a 5% probability of losing ________% or more in any given year.
$\begin{array}{cr}
\text { Probability } & \text { "z" value } \
\text { of loss } & \
1.0\% & 2.326 \
2.5 & 1.960 \
5.0 & 1.645
\end{array}$

Accepted Answer

A) 33.79 
B) 31.54 
C) 12.59 
D) 10.63 
E) 3.34 
A) 33.79 
B) 31.54 
C) 12.59 
D) 10.63 
E) 3.34

Question 18

The risk premium of a portfolio divided by the portfolio's standard deviation defines which one of the following performance measures?

Accepted Answer

A) raw return 
B) Value-at-Risk 
C) Jensen's alpha 
D) Sharpe ratio 
E) Treynor ratio 
A) raw return 
B) Value-at-Risk 
C) Jensen's alpha 
D) Sharpe ratio 
E) Treynor ratio

Question 19

The Sharpe-optimal portfolio will be the investment opportunity set which lies on a straight line that has which of the following characteristics?

Accepted Answer

A) the flattest slope when the line intersects the vertical axis at the risk-free rate 
B) the steepest slope when the line intersects the vertical axis at the risk-free rate 
C) the steepest slope when the line intersects the vertical axis at the origin 
D) the flattest slope when the line intersects the vertical axis at the market rate 
E) the steepest slope when the line intersects the vertical axis at the market rate 
A) the flattest slope when the line intersects the vertical axis at the risk-free rate 
B) the steepest slope when the line intersects the vertical axis at the risk-free rate 
C) the steepest slope when the line intersects the vertical axis at the origin 
D) the flattest slope when the line intersects the vertical axis at the market rate 
E) the steepest slope when the line intersects the vertical axis at the market rate

Question 20

Which one of the following is computed by dividing a portfolio's risk premium by the portfolio beta?

Accepted Answer

A) raw return 
B) Value-at-Risk 
C) Jensen's alpha 
D) Sharpe ratio 
E) Treynor ratio 
A) raw return 
B) Value-at-Risk 
C) Jensen's alpha 
D) Sharpe ratio 
E) Treynor ratio

Exam 13: Performance Evaluation and Risk Management

You are comparing three assets which have differing Treynor ratios. Given this, which one of the following must be true?

High Mountain Homes has an expected annual return of 16.1% and a standard deviation of 20.3%. What is the smallest expected loss over the next month given a probability of 2.5%?

A portfolio has a 2.0% chance of losing 15% or more according to the VaR when T = 1. This can be interpreted to mean that the portfolio is expected to have an annual loss of 15% or more once in every how many years?

Your portfolio has an expected return of 12.9%, a beta of 1.52, and a standard deviation of 19.4%. The U.S. Treasury bill rate is 1.35%. What is the Sharpe ratio of your portfolio?

Which one of the following statements is correct in relation to a security that has a negative Jensen's alpha?

A fund has an alpha of .89% and a tracking error of 3.8%. What is the fund's information ratio?

Which of the following should generally only be used to evaluate relatively diversified portfolios rather than individual securities? I. Sharpe ratio II. Treynor ratio III. Jensen's alpha

The U.S. Treasury bill is yielding 1.0% and the market has an expected return of 14.5%. What is the Treynor ratio of a correctly valued portfolio that has a beta of 1.26 and a standard deviation of 11.1%?

What is Jensen's alpha of a portfolio comprised of 40% Portfolio A and 60% of Portfolio B? Portfolio Average Return Standard Deviation Beta A 16.3\% 21.5\% 1.58 B 11.1 10.6 1.15 The risk-free rate is 1.8% and the market risk premium is 5.3%.

Which of the following are related to VaR analysis? I. beta II. standard deviation III. expected return IV. time

The Jensen-Treynor alpha is equal to:

Which one of the following concerns a money manager's control over investment risks, particularly potential short-run losses?

A portfolio has a beta of 1.42 and an actual return of 13.5%. The risk-free rate is 1.5% and the market risk premium is 7.4%. What is the value of Jensen's alpha?

A portfolio has an average return of 9.9%, a standard deviation of 12.3%, and a beta of 1.23. The risk-free rate is 1.9%. What is the Sharpe ratio?

You are comparing three securities and discover they all have identical Treynor ratios. Given this information, which one of the following must be true regarding these three securities?

What is the Treynor ratio of a portfolio comprised of 45% Portfolio A and 55% Portfolio B? A B Neight 45\% 55\% Avg Return 13.60\% 8.40\% Std Dev 17.20\% 6.40\% Beta 1.38 0.87 The risk-free rate is 3.12% and the market risk premium is 8.5%.

Your portfolio has a standard deviation of 12.3% and an average return of 9.6%. You have a 5% probability of losing ________% or more in any given year. Probability "z" value of loss 1.0\% 2.326 2.5 1.960 5.0 1.645

The risk premium of a portfolio divided by the portfolio's standard deviation defines which one of the following performance measures?

The Sharpe-optimal portfolio will be the investment opportunity set which lies on a straight line that has which of the following characteristics?

Which one of the following is computed by dividing a portfolio's risk premium by the portfolio beta?

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