Question 1

The comparison universe is

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)  None of the options are correct. 
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)  None of the options are correct. D

Question 2

You want to evaluate three mutual funds using the Treynor measure for performance evaluation. The risk-free return during the sample period is 6%. The average returns, standard deviations, and betas for the three funds are given below, in addition to information regarding the S&P 500 Index. $$\begin{array} { c c r r } 
& \begin{array} { c } 
\text { Average } \
\text { Return }
\end{array} & \begin{array} { r } 
\text { Standard } \
\text { Deviation }
\end{array} & \text { Beta } \
\hline \text { Fund A } & 13 \% & 10 \% & 0.5 \
\text { Fund B } & 19 \% & 20 \% & 1.0 \
\text { Fund C } & 25 \% & 30 \% & 1.5 \
\text { S\&P 500 } & 18 \% & 16 \% & 1.0
\end{array}$$ The fund with the highest Treynor measure is

Accepted Answer

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

Question 3

Suppose two portfolios have the same average return and 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 are no data on the alpha of the portfolio. 
E)  None of the options are correct. 
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 are no data on the alpha of the portfolio. 
E)  None of the options are correct. C

Question 4

Suppose you buy 100 shares of Abolishing Dividend Corporation at the beginning of year 1 for $80. Abolishing Dividend Corporation pays no dividends. The stock price at the end of year 1 is $100, $120 at the end of year 2, and $150 at the end of year 3. The stock price declines to $100 at the end of year 4, and you sell your 100 shares. For the four years, your geometric average return is

Accepted Answer

A)  0.0%. 
B)  1.0%. 
C)  5.7%. 
D)  9.2%. 
E)  34.5%. 
A)  0.0%. 
B)  1.0%. 
C)  5.7%. 
D)  9.2%. 
E)  34.5%.

Question 5

You want to evaluate three mutual funds using the Sharpe measure for performance evaluation. The risk-free return during the sample period is 4%. The average returns, standard deviations, and betas for the three funds are given below, as are the data for the S&P 500 Index. $\begin{array}{c}
\begin{array}{lll}
\text {  } \
\text {  } \
\text {  } \
\text { Fund A } \
\text { Fund B } \
\text { Fund C } \
\text { S\&P 500 } \
\end{array}
\begin{array}{lll}
\text {  } \
\text { Average } \
\text {Return  } \
18\% \
15\% \
11\% \
10\%
\end{array}
\begin{array}{lll}
\text {}\
\text { Standand
 } \
\text {  Deviation.
} \
\text {38\%  } \
\text {27\%  } \
\text { 24\% } \
22\%
\end{array}
\begin{array}{lll}
\text {  } \
\text {  } \
\text {Beta  } \
\text { 1.6 } \
\text { 1.3 } \
\text { 1.0 } \
1.0
\end{array}
\end{array}$
 The fund with the highest Sharpe measure is

Accepted Answer

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

Question 6

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

Accepted Answer

A)  -1.80%. 
B)  -1.00%. 
C)  0.80%. 
D)  1.00%. 
A)  -1.80%. 
B)  -1.00%. 
C)  0.80%. 
D)  1.00%.

Question 7

The __________ measures the reward to volatility trade-off by dividing the average portfolio excess return by the standard deviation of returns.

Accepted Answer

A)  Sharpe measure 
B)  Treynor measure 
C)  Jensen measure 
D)  information ratio 
E)  None of the options are correct. 
A)  Sharpe measure 
B)  Treynor measure 
C)  Jensen measure 
D)  information ratio 
E)  None of the options are correct.

Question 8

Suppose the risk-free return is 3%. The beta of a managed portfolio is 1.75, the alpha is 0%, and the average return is 16%. Based on Jensen's measure of portfolio performance, you would calculate the return on the market portfolio as

Accepted Answer

A)  12.3%. 
B)  10.4%. 
C)  15.1%. 
D)  16.7%. 
A)  12.3%. 
B)  10.4%. 
C)  15.1%. 
D)  16.7%.

Question 9

The following data are available relating to the performance of Wildcat Fund and the market portfolio: $$\begin{array} { l c c } 
& & { \text { Market } } \
& \text { Wildcat } & \text { Portfolio } \
\text { Average return } & 18 \% & 15 \% \
\text { Standard deviations of returns } & 25 \% & 20 \% \
\text { Beta } & 1.25 & 1.00 \
\text { Residual standard deviation } & 2 \% & 0 \%\

\end{array}$$ The risk-free return during the sample period was 7%. Calculate Treynor's measure of performance for Wildcat Fund.

Accepted Answer

A)  1.00% 
B)  8.80% 
C)  44.00% 
D)  50.00% 
A)  1.00% 
B)  8.80% 
C)  44.00% 
D)  50.00%

Question 10

You want to evaluate three mutual funds using the Jensen measure for performance evaluation. The risk-free return during the sample period is 6%, and the average return on the market portfolio is 18%. The average returns, standard deviations, and betas for the three funds are given below. $\begin{array}{c}
\begin{array}{lll}
\text {  } \
\text {  } \
\text {  } \
\text { Fund A } \
\text { Fund B } \
\text { Fund C } \
\end{array}
\begin{array}{lll}
\text {  } \
\text { Average } \
\text {Return  } \
17.6\% \
17.5\% \
17.4\% \
\end{array}
\begin{array}{lll}
\text {Residual
  } \
\text { Standand
 } \
\text {  Deviation.
} \
\text {10\%  } \
\text {20\%  } \
\text { 30\% } \
\end{array}
\begin{array}{lll}
\text {  } \
\text {  } \
\text {Beta  } \
\text { 1.2 } \
\text { 1.0 } \
\text { 0.8 } \
\end{array}
\end{array}$
 The fund with the highest Jensen measure is

Accepted Answer

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

Question 11

The following data are available relating to the performance of Seminole Fund and the market portfolio: $\begin{array}{lcc} 
& & \text { Market } \
& \text { Seminole}&\text{ Portfoli } \
\text { Average return } & 18 \% & 14 \% \
\text { Standard deviations of returns } & 30 \% & 22 \% \
\text { Beta } & 1.4 & 1.0 \
\text { Residual standard deviation } & 4.0 \% & 0.0 \%
\end{array}$ The risk-free return during the sample period was 6%. Calculate the M2 measure for the Seminole Fund.

Accepted Answer

A)  4.0% 
B)  20.0% 
C)  2.86% 
D)  0.8% 
E)  40.0% 
A)  4.0% 
B)  20.0% 
C)  2.86% 
D)  0.8% 
E)  40.0%

Question 12

In a particular year, Razorback Mutual Fund earned a return of 1% by making the following investments in asset classes: $\begin{array}{lcc} 
& \text { Weight } & \text { Return } \
\hline \text { Bonds } & 20 \% & 5 \% \
\text { Stocks } & 80 \% & 0 \% \
\hline
\end{array}$ The return on a bogey portfolio was 2%, calculated from the following information. $\begin{array}{lrrr} 
& & \text { Weight } & \text { Return } \
\text { Bonds (Lehman Brothers Index) } & 50  \% & 5 \%\
\text { Stocks (S\&P } 500 \text { Index) } & 50 \% & -1 \% \
\hline
\end{array}$ 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%. 
A)  -1.80%. 
B)  -1.00%. 
C)  0.80%. 
D)  1.00%.

Question 13

Rodney holds a portfolio of risky assets that represents his entire risky investment. To evaluate the performance of Rodney's portfolio, in which order would you complete the steps listed? I) Compare the Sharpe measure of Rodney's portfolio to the Sharpe measure of the best portfolio.
II) State your conclusions.
III) Assume that past security performance is representative of expected performance.
IV) Determine the benchmark portfolio that Rodney would have held if he had chosen a passive strategy.

Accepted Answer

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

Question 14

The following data are available relating to the performance of Monarch Stock Fund and the market portfolio: $$\begin{array} { l c c } 
& & \text { Market } \
& \text { Monarch } & \text { Portfolio } \
\text { Average return } & 16 \% & 12 \% \
\text { Standard deviations of returns } & 26 \% & 22 \% \
\text { Beta } & 1.15 & 1.00 \
\text { Residual standard deviation } & 1 \% & 0 \% \

\end{array}$$ The risk-free return during the sample period was 4%. Calculate Treynor's measure of performance for Monarch Stock Fund.

Accepted Answer

A)  10.40% 
B)  8.80% 
C)  44.00% 
D)  50.00% 
A)  10.40% 
B)  8.80% 
C)  44.00% 
D)  50.00%

Question 15

The following data are available relating to the performance of Wildcat Fund and the market portfolio: $$\begin{array} { l c c } 
& & { \text { Market } } \
& \text { Wildcat } & \text { Portfolio } \
\text { Average return } & 18 \% & 15 \% \
\text { Standard deviations of returns } & 25 \% & 20 \% \
\text { Beta } & 1.25 & 1.00 \
\text { Residual standard deviation } & 2 \% & 0 \%\

\end{array}$$ The risk-free return during the sample period was 7%. Calculate Sharpe's measure of performance for Wildcat Fund.

Accepted Answer

A)  1.00% 
B)  8.80% 
C)  44.00% 
D)  50.00% 
A)  1.00% 
B)  8.80% 
C)  44.00% 
D)  50.00%

Question 16

Suppose you purchase one share of the stock of Cereal Correlation Company at the beginning of year 1 for $50. At the end of year 1, you receive a $1 dividend and buy one more share for $72. At the end of year 2, you receive total dividends of $2 (i.e., $1 for each share) and sell the shares for $67.20 each. The dollar-weighted return on your investment is

Accepted Answer

A)  10.00%. 
B)  8.78%. 
C)  19.71%. 
D)  20.36%. 
A)  10.00%. 
B)  8.78%. 
C)  19.71%. 
D)  20.36%.

Question 17

The following data are available relating to the performance of Wildcat Fund and the market portfolio: $$\begin{array} { l c c } 
& & { \text { Market } } \
& \text { Wildcat } & \text { Portfolio } \
\text { Average return } & 18 \% & 15 \% \
\text { Standard deviations of returns } & 25 \% & 20 \% \
\text { Beta } & 1.25 & 1.00 \
\text { Residual standard deviation } & 2 \% & 0 \%\

\end{array}$$ The risk-free return during the sample period was 7%. Calculate Jensen's measure of performance for Wildcat Fund.

Accepted Answer

A)  1.00% 
B)  8.80% 
C)  44.00% 
D)  50.00% 
A)  1.00% 
B)  8.80% 
C)  44.00% 
D)  50.00%

Question 18

Risk-adjusted mutual fund performance measures have decreased in popularity because

Accepted Answer

A)  in nearly efficient markets, it is extremely difficult for portfolio managers to outperform the market. 
B)  the measures usually result in negative performance results for the portfolio managers. 
C)  the high rates of return earned by the mutual funds have made the measures useless. 
D)  in nearly efficient markets, it is extremely difficult for portfolio managers to outperform the market, and the . measures usually result in negative performance results for the portfolio managers. 
E)  None of the options are correct. 
A)  in nearly efficient markets, it is extremely difficult for portfolio managers to outperform the market. 
B)  the measures usually result in negative performance results for the portfolio managers. 
C)  the high rates of return earned by the mutual funds have made the measures useless. 
D)  in nearly efficient markets, it is extremely difficult for portfolio managers to outperform the market, and the . measures usually result in negative performance results for the portfolio managers. 
E)  None of the options are correct.

Question 19

__________ developed a popular method for risk-adjusted performance evaluation of mutual funds.

Accepted Answer

A)  Eugene Fama 
B)  Michael Jensen 
C)  William Sharpe 
D)  Jack Treynor 
E)  Michael Jensen, William Sharpe, and Jack Treynor 
A)  Eugene Fama 
B)  Michael Jensen 
C)  William Sharpe 
D)  Jack Treynor 
E)  Michael Jensen, William Sharpe, and Jack Treynor

Question 20

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

Accepted Answer

A)  1%. 
B)  3%. 
C)  4%. 
D)  5%. 
A)  1%. 
B)  3%. 
C)  4%. 
D)  5%.

The comparison universe is

Suppose two portfolios have the same average return and 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

The __________ measures the reward to volatility trade-off by dividing the average portfolio excess return by the standard deviation of returns.

Suppose the risk-free return is 3%. The beta of a managed portfolio is 1.75, the alpha is 0%, and the average return is 16%. Based on Jensen's measure of portfolio performance, you would calculate the return on the market portfolio as

Risk-adjusted mutual fund performance measures have decreased in popularity because

__________ developed a popular method for risk-adjusted performance evaluation of mutual funds.

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

International Diversification

Hedge Funds

The Theory of Active Portfolio Management

Investment Policy and the Framework of the Cfa Institute

Filters

Exam 24: Portfolio Performance Evaluation

The comparison universe is

Suppose two portfolios have the same average return and 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

The __________ measures the reward to volatility trade-off by dividing the average portfolio excess return by the standard deviation of returns.

Suppose the risk-free return is 3%. The beta of a managed portfolio is 1.75, the alpha is 0%, and the average return is 16%. Based on Jensen's measure of portfolio performance, you would calculate the return on the market portfolio as

Risk-adjusted mutual fund performance measures have decreased in popularity because

__________ developed a popular method for risk-adjusted performance evaluation of mutual funds.

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

International Diversification

Hedge Funds

The Theory of Active Portfolio Management

Investment Policy and the Framework of the Cfa Institute

Filters