Question 1

A manager who uses the mean-variance theory to construct an optimal portfolio will satisfy

Accepted Answer

A)  investors with low risk-aversion coefficients. 
B)  investors with high risk-aversion coefficients. 
C)  investors with moderate risk-aversion coefficients. 
D)  all investors regardless of their level of risk aversion. 
E)  only clients with whom she has established long-term relationships because she knows their personal 
A)  investors with low risk-aversion coefficients. 
B)  investors with high risk-aversion coefficients. 
C)  investors with moderate risk-aversion coefficients. 
D)  all investors regardless of their level of risk aversion. 
E)  only clients with whom she has established long-term relationships because she knows their personal D

Question 2

Passive 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. C

Question 3

A purely passive strategy

Accepted Answer

A)  uses only index funds. 
B)  uses weights that change in response to market conditions. 
C)  uses only risk-free assets. 
D)  is best if there is "noise" in realized returns. 
E)  is useless if abnormal returns are available. 
A)  uses only index funds. 
B)  uses weights that change in response to market conditions. 
C)  uses only risk-free assets. 
D)  is best if there is "noise" in realized returns. 
E)  is useless if abnormal returns are available. A

Question 4

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 5

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 6

Consider these two investment strategies: $$\begin{array} { l c r } 
& \text { Strategy } 1 ( \% ) & \text { Strategy 2(\%) } \
\text { Expected return } & 5 & 10 \
\text { Standard deviation } & 0 & 3 \
\text { Highest return } & 6 & 12 \
\text { Lowest return } & 5 & 6 \
\hline
\end{array}$$ 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 7

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 commodities contract 
A)  a call option 
B)  a futures contract 
C)  a put option 
D)  a commodities contract

Question 8

Ideally, clients would like to invest with the portfolio manager who has

Accepted Answer

A)  a moderate personal risk-aversion coefficient. 
B)  a low personal risk-aversion coefficient. 
C)  the highest Sharpe measure. 
D)  the highest record of realized returns. 
E)  the lowest record of standard deviations. 
A)  a moderate personal risk-aversion coefficient. 
B)  a low personal risk-aversion coefficient. 
C)  the highest Sharpe measure. 
D)  the highest record of realized returns. 
E)  the lowest record of standard deviations.

Question 9

In the Treynor-Black model,

Accepted Answer

A)  portfolio weights are sensitive to large alpha values, which can lead to infeasible long or short positions for many portfolio managers. 
B)  portfolio weights are not sensitive to large alpha values, which can lead to infeasible long or short positions for many portfolio managers. 
C)  portfolio weights are sensitive to large alpha values, which can lead to the optimal portfolio for most portfolio managers. 
D)  portfolio weights are not sensitive to large alpha values, which can lead to the optimal portfolio for most 
A)  portfolio weights are sensitive to large alpha values, which can lead to infeasible long or short positions for many portfolio managers. 
B)  portfolio weights are not sensitive to large alpha values, which can lead to infeasible long or short positions for many portfolio managers. 
C)  portfolio weights are sensitive to large alpha values, which can lead to the optimal portfolio for most portfolio managers. 
D)  portfolio weights are not sensitive to large alpha values, which can lead to the optimal portfolio for most

Question 10

Alpha forecasts must be ____________ to account for less-than-perfect forecasting quality. When alpha forecasts are ____________ to account for forecast imprecision, the resulting portfolio position becomes ____________.

Accepted Answer

A)  shrunk; shrunk; far less moderate 
B)  shrunk; shrunk; far more moderate 
C)  grossed up; grossed up; far less moderate 
D)  grossed up; grossed up; far more moderate 
E)  None of the options are correct. 
A)  shrunk; shrunk; far less moderate 
B)  shrunk; shrunk; far more moderate 
C)  grossed up; grossed up; far less moderate 
D)  grossed up; grossed up; far more moderate 
E)  None of the options are correct.

Question 11

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 12

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 
E)  None of the options are correct. 
A)  posterior distribution; prior distribution 
B)  prior distribution; posterior distribution 
C)  tight posterior; Bayesian analysis 
D)  tight prior; Bayesian analysis 
E)  None of the options are correct.

Question 13

The tracking error of an optimized portfolio can be expressed in terms of the ____________ of the portfolio, and thus reveals ____________.

Accepted Answer

A)  return; portfolio performance 
B)  total risk; portfolio performance 
C)  beta; portfolio performance 
D)  beta; benchmark risk 
E)  relative return; benchmark risk 
A)  return; portfolio performance 
B)  total risk; portfolio performance 
C)  beta; portfolio performance 
D)  beta; benchmark risk 
E)  relative return; benchmark risk

Question 14

The Treynor-Black model does not assume that
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.

Accepted Answer

A. the objective of security analysis is

Question 15

To determine the optimal risky portfolio in the Treynor-Black model, macroeconomic forecasts are used for the _________, and composite forecasts are used for the __________.

Accepted Answer

A)  passive index portfolio; active portfolio 
B)  active portfolio, passive index portfolio 
C)  expected return; standard deviation 
D)  expected return ; beta coefficient 
E)  alpha coefficient; beta coefficient 
A)  passive index portfolio; active portfolio 
B)  active portfolio, passive index portfolio 
C)  expected return; standard deviation 
D)  expected return ; beta coefficient 
E)  alpha coefficient; beta coefficient

Question 16

Benchmark risk

Accepted Answer

A)  is inevitable and is never a significant issue in practice. 
B)  is inevitable and is always a significant issue in practice. 
C)  cannot be constrained to keep a Treynor-Black portfolio within reasonable weights. 
D)  can be constrained to keep a Treynor-Black portfolio within reasonable weights. 
A)  is inevitable and is never a significant issue in practice. 
B)  is inevitable and is always a significant issue in practice. 
C)  cannot be constrained to keep a Treynor-Black portfolio within reasonable weights. 
D)  can be constrained to keep a Treynor-Black portfolio within reasonable weights.

Question 17

The Treynor-Black model requires estimates of

Accepted Answer

A)  alpha/beta. 
B)  alpha/beta/residual variance. 
C)  beta/residual variance. 
D)  alpha/residual variance. 
A)  alpha/beta. 
B)  alpha/beta/residual variance. 
C)  beta/residual variance. 
D)  alpha/residual variance.

Question 18

The Treynor-Black model

Accepted Answer

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

Question 19

The Black-Litterman model is geared toward ____________ while the Treynor-Black model is geared toward ____________.

Accepted Answer

A)  security analysis; security analysis 
B)  asset allocation; asset allocation 
C)  security analysis; asset allocation 
D)  asset allocation; security analysis 
E)  None of the options are correct. 
A)  security analysis; security analysis 
B)  asset allocation; asset allocation 
C)  security analysis; asset allocation 
D)  asset allocation; security analysis 
E)  None of the options are correct.

Question 20

An active portfolio manager faces a trade-off between I) using the Sharpe measure.
II. using mean-variance analysis.
III. exploiting perceived security mispricings.
IV. holding too much of the risk-free asset.
V. letting a few stocks dominate the portfolio.

Accepted Answer

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

Exam 27: The Theory of Active Portfolio Management

A manager who uses the mean-variance theory to construct an optimal portfolio will satisfy

Passive portfolio management consists of

A purely passive strategy

Benchmark risk is defined as

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

Consider these two investment strategies: Strategy 1(\%) Strategy 2(\%) Expected return 5 10 Standard deviation 0 3 Highest return 6 12 Lowest return 5 6 Strategy __________ is the dominant strategy because __________.

Perfect timing ability is equivalent to having __________ on the market portfolio.

Ideally, clients would like to invest with the portfolio manager who has

In the Treynor-Black model,

Alpha forecasts must be ____________ to account for less-than-perfect forecasting quality. When alpha forecasts are ____________ to account for forecast imprecision, the resulting portfolio position becomes ____________.

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

The tracking error of an optimized portfolio can be expressed in terms of the ____________ of the portfolio, and thus reveals ____________.

To determine the optimal risky portfolio in the Treynor-Black model, macroeconomic forecasts are used for the _________, and composite forecasts are used for the __________.

Benchmark risk

The Treynor-Black model requires estimates of

The Treynor-Black model

The Black-Litterman model is geared toward ____________ while the Treynor-Black model is geared toward ____________.

An active portfolio manager faces a trade-off between I) using the Sharpe measure. II. using mean-variance analysis. III. exploiting perceived security mispricings. IV. holding too much of the risk-free asset. V. letting a few stocks dominate the portfolio.

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

Consider these two investment strategies: Strategy 1(\%) Strategy 2(\%) Expected return 5 10 Standard deviation 0 3 Highest return 6 12 Lowest return 5 6 Strategy is the dominant strategy because .

Alpha forecasts must be to account for less-than-perfect forecasting quality. When alpha forecasts are to account for forecast imprecision, the resulting portfolio position becomes .

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

The tracking error of an optimized portfolio can be expressed in terms of the of the portfolio, and thus reveals .

To determine the optimal risky portfolio in the Treynor-Black model, macroeconomic forecasts are used for the _, and composite forecasts are used for the __.

The Black-Litterman model is geared toward while the Treynor-Black model is geared toward .