Deck 22: Evaluation of Investment Performance

Question 1

Which of the following measures indicates the percentage of the variation in a portfolio's returns that is explained by variation in the market's returns?

A) Standard deviation
B) Coefficient of determination
C) Beta
D) Alpha

Answer 1

B

Question 2

Which index is most appropriate as a benchmark for a large-cap mutual fund?

A) Wilshire 5000
B) S&P 500
C) Dow Jones Industrial Average
D) Russell 2000

Answer 2

B

Question 3

The information ratio is calculated as the ratio of:

A) mean active return to tracking risk.
B) alpha to beta.
C) excess return to portfolio standard deviation.
D) portfolio excess return to tracking risk.

Answer 3

A

Question 4

The information in the following table is to be used to answer questions
$\begin{array}{|l|c|c|c|c|}\hline \text { Fund } & \text { Standard Deviation } & \text { Beta } & \begin{array}{c}\text { Jensen's } \\\text { Alpha }\end{array} & \mathbf{R}^{\mathbf{2}} \\\hline \text { Fund 1 } & 1.97 & 1.0 & 1.3 & 0.95 \\\hline \text { Fund 2 } & 2.97 & 0.8 & 0.6^{*} & 0.80 \\\hline \text { Fund 3 } & 3.82 & 1.2 & -3.5^{*} & 0.90 \\\hline \text { Fund 4 } & 3.50 & 1.4 & 4.2 & 0.65 \\\hline\end{array}$

-Based on Jensen's performance measure, which fund significantly outperformed?

A) Fund 1
B) Fund 2
C) Fund 3
D) Fund 4

Question 5

The Global Investment Performance Standards (GIPS) were created by:

A) the CFA Institute.
B) the Securities and Exchange Commission (SEC).
C) Morningstar.
D) the Federal Reserve.

Question 6

Which of the following measures uses the standard deviation and evaluates portfolio performance on the basis of both return and diversification.

A) Jensen's alpha
B) Treynor measure
C) M2
D) Sharpe ratio

Question 7

The information in the following table is to be used to answer questions
$\begin{array}{|l|c|c|c|c|}\hline \text { Fund } & \text { Standard Deviation } & \text { Beta } & \begin{array}{c}\text { Jensen's } \\\text { Alpha }\end{array} & \mathbf{R}^{\mathbf{2}} \\\hline \text { Fund 1 } & 1.97 & 1.0 & 1.3 & 0.95 \\\hline \text { Fund 2 } & 2.97 & 0.8 & 0.6^{*} & 0.80 \\\hline \text { Fund 3 } & 3.82 & 1.2 & -3.5^{*} & 0.90 \\\hline \text { Fund 4 } & 3.50 & 1.4 & 4.2 & 0.65 \\\hline\end{array}$

-Which fund's returns are best explained by the market's returns?

A) Fund 1
B) Fund 2
C) Fund 3
D) Fund 4

Question 8

Superior portfolio performance can result from:

A) the ability to select undervalued securities, only.
B) the ability to time market turns, only.
C) superior selectivity or timing performance.
D) neither superior selectivity nor timing because the market is too efficient.

Question 9

The information in the following table is to be used to answer questions
$\begin{array}{|l|c|c|c|c|}\hline \text { Fund } & \text { Standard Deviation } & \text { Beta } & \begin{array}{c}\text { Jensen's } \\\text { Alpha }\end{array} & \mathbf{R}^{\mathbf{2}} \\\hline \text { Fund 1 } & 1.97 & 1.0 & 1.3 & 0.95 \\\hline \text { Fund 2 } & 2.97 & 0.8 & 0.6^{*} & 0.80 \\\hline \text { Fund 3 } & 3.82 & 1.2 & -3.5^{*} & 0.90 \\\hline \text { Fund 4 } & 3.50 & 1.4 & 4.2 & 0.65 \\\hline\end{array}$

-Which fund has the most total risk?

A) Fund 1
B) Fund 2
C) Fund 3
D) Fund 4

Question 10

The information in the following table is to be used to answer questions
$\begin{array}{|l|c|c|c|c|}\hline \text { Fund } & \text { Standard Deviation } & \text { Beta } & \begin{array}{c}\text { Jensen's } \\\text { Alpha }\end{array} & \mathbf{R}^{\mathbf{2}} \\\hline \text { Fund 1 } & 1.97 & 1.0 & 1.3 & 0.95 \\\hline \text { Fund 2 } & 2.97 & 0.8 & 0.6^{*} & 0.80 \\\hline \text { Fund 3 } & 3.82 & 1.2 & -3.5^{*} & 0.90 \\\hline \text { Fund 4 } & 3.50 & 1.4 & 4.2 & 0.65 \\\hline\end{array}$

-Which of the funds has the most market risk?

A) Fund 1
B) Fund 2
C) Fund 3
D) Fund 4

Question 11

The information in the following table is to be used to answer questions
$\begin{array}{|l|c|c|c|c|}\hline \text { Fund } & \text { Standard Deviation } & \text { Beta } & \begin{array}{c}\text { Jensen's } \\\text { Alpha }\end{array} & \mathbf{R}^{\mathbf{2}} \\\hline \text { Fund 1 } & 1.97 & 1.0 & 1.3 & 0.95 \\\hline \text { Fund 2 } & 2.97 & 0.8 & 0.6^{*} & 0.80 \\\hline \text { Fund 3 } & 3.82 & 1.2 & -3.5^{*} & 0.90 \\\hline \text { Fund 4 } & 3.50 & 1.4 & 4.2 & 0.65 \\\hline\end{array}$

-Which fund is least well-diversified?

A) Fund 1
B) Fund 2
C) Fund 3
D) Fund 4

Question 12

What alternative portfolio mirrors the objectives of a portfolio under evaluation?

A) Market average index
B) Efficient portfolio
C) Benchmark portfolio
D) Performance standard

Question 13

Relative to the Sharpe ratio, the Sortino ratio will make a portfolio's performance look more favorable if the portfolio has experienced:

A) fewer extreme negative returns relative to extreme positive returns.
B) fewer extreme positive returns relative to extreme negative returns.
C) an equal number of extreme positive and extreme negative returns.
D) virtually no extreme negative or extreme positive returns.

Question 14

A portfolio with a beta of 0.8 earned a return of 13 percent when the risk-free rate was 6 percent and the market returned 9 percent. The portfolio's Treynor measure is closest to:

A) 1.8.
B) 3.8.
C) 5.0.
D) 8.8.

Question 15

The reward-to-variability ratio (Sharpe ratio) measures:

A) return above the risk-free rate.
B) excess return per unit of total risk.
C) total risk per unit of excess return.
D) return above the risk-free rate relative to beta.

Question 16

What is the major question when evaluating a portfolio's performance?

A) Does the portfolio align with the investor's characteristics?
B) Does the expected return of the portfolio meet the needs of the investor?
C) Is the return on the portfolio adequate to compensate for its risk?
D) Is the portfolio's risk in line with the personal characteristics of the investor?

Question 17

If we are to assess performance carefully, we must do so on what kind of basis?

A) Quarterly
B) Annual
C) Attribution-weighted
D) Risk-adjusted

Question 18

Which of the following statements about the Sharpe ratio and Treynor ratio is most accurate? The Sharpe ratio is based on:

A) total risk, whereas the Treynor ratio is based on systematic risk.
B) systematic risk, whereas the Treynor ratio is based on total risk.
C) unsystematic risk, whereas the Treynor ratio is based on systematic risk.
D) total risk, whereas the Treynor ratio is based on unsystematic risk.

Question 19

Assume Portfolio A and Portfolio B are well-diversified; however, Portfolio A has a higher standard deviation than Portfolio B. Based on this information, the Sharpe ratio will give Portfolio A:

A) the higher rank, and the Treynor ratio will give Portfolio B the higher rank.
B) the lower rank, and the Treynor ratio will give Portfolio B the lower rank.
C) the same rank as the rank assigned by the Treynor ratio.
D) a rank that varies directly based on the overall market risk.

Question 20

According to Jensen's differential return measure, what is alpha?

A) The intercept of the SML line
B) The intercept of the CML line
C) A measure of the superior or inferior performance on a portfolio
D) The actual excess return on a portfolio during one period

Question 21

Which of the following is true regarding M2? It produces a measure of portfolio performance that:

A) is adjusted for systematic risk.
B) can be compared directly to the risk-free rate.
C) can be compared directly with the market return.
D) indicates what would be possible if the portfolio was fully leveraged.

Question 22

Value at risk (VaR) is a measure of the:

A) maximum potential loss.
B) amount of loss that should be expected in the future.
C) minimum loss that should be expected if a low probability negative event occurs.
D) maximum loss that is anticipated if a market crash occurs.

Question 23

One approach to style analysis which uses the features of the stocks in the portfolio is known as:

A) returns-based style analysis.
B) asset allocation style analysis.
C) holdings-based style analysis.
D) mix-based style analysis.

Question 24

Which of the following is the largest recognized problem with style analysis?

A) Funds frequently do not maintain style consistency over time.
B) Comparing style across funds is nearly impossible.
C) It is very difficult to determine the style a fund is following.
D) There are too many alternative means to calculate a fund's style.

Question 25

In conducting risk management of his firm, Jack derives a 5% weekly VaR value. Which of the following combination of changes would produce the largest increase in the VaR value?

A) Changing to a 1% monthly VaR
B) Changing to a 10% monthly VaR
C) Changing to a 1% daily VaR
D) Changing to a 10% daily VaR

Question 26

Which of the following statements about return calculation is most accurate?

A) Time-weighted returns are always higher than money-weighted returns.
B) Money-weighted returns are always higher than time-weighted returns.
C) The GIPS require that time-weighted returns are reported for most asset classes.
D) The time-weighted return is equivalent to the IRR.

Question 27

To claim GIPS compliance in reporting portfolio performance, the standards require:

A) a 5-year performance record, or since inception if the fund is less than 5-years old.
B) that the majority of the firm's funds meet GIPS standards.
C) that the majority of the firm's portfolios are included in the performance record.
D) a firm build toward a minimum record of 20 years of reported performance.

Question 28

A portfolio's tracking risk indicates the portfolio's:

A) total volatility.
B) systematic risk.
C) divergence from its benchmark.
D) downside risk.

Question 29

Relative to its benchmark, an index fund should have an upside and downside capture of approximately:

A) 0%.
B) 50%.
C) 75%.
D) 100%.

Question 30

Performance attribution separates return performance into the following two sources:

A) security analysis and portfolio management.
B) money market and capital market securities.
C) traditional assets and alternative assets.
D) asset allocation and security selection.

Question 31

Which measure calculates performance relative to a benchmark portfolio?

A) Sortino ratio
B) M2
C) Information ratio
D) Sharpe ratio

Question 32

Carl invested $100,000 in a fund, which earned 8% over the next year. At the end of the year, he invested an additional $50,000 and the fund earned 18% over the next year. Carl withdrew no money from the fund. Which of the following statements about time-weighted return (TWR) and money-weighted return (MWR) is most accurate?

A) TWR is greater than MWR, and MWR is the more appropriate measure for Carl.
B) MWR is greater than TWR, and MWR is the more appropriate measure for Carl.
C) TWR is greater than MWR, and TWR is the more appropriate measure for Carl.
D) MWR is greater than TWR, and TWR is the more appropriate measure for Carl.

Question 33

* Use the following information to answer the next three questions *
$$\begin{array} { | l | c | c | c | } \hline \text { Asset } & \begin{array} { c } \text { Mean Annual } \\\text { Return }\end{array} & \text { Beta } & \begin{array} { c } \text { Standard } \\\text { Devintinn }\end{array} \\\hline \text { Fund A } & 16 \% & 1.20 & 24 \% \\\hline \text { Benchrnark } & 14 \% & 1.10 & 19 \% \\\hline \text { Fund A minus Benchrnark } & 2 \% & \text { NA } & 4 \% \\\hline \text { Treasury Security } & 3 \% & \text { NA } & \text { NA } \\\hline\end{array}$$

-The Sharpe ratio for Fund A is closest to:

A) 0.1.
B) 0.4.
C) 0.5.
D) 0.7.

Question 34

Which organization has issued minimum standards for the reporting of investment performance?

A) FINRA
B) Securities and Exchange Commission (SEC)
C) Association for Security Analysts and Portfolio Managers
D) CFA Institute

Question 35

Based on Jensen's measure, superior portfolio performance is exhibited by a:

A) statistically significant positive alpha.
B) statistically significant negative alpha.
C) zero alpha.
D) low positive alpha.

Question 36

* Use the following information to answer the next three questions *
$$\begin{array} { | l | c | c | c | } \hline \text { Asset } & \begin{array} { c } \text { Mean Annual } \\\text { Return }\end{array} & \text { Beta } & \begin{array} { c } \text { Standard } \\\text { Devintinn }\end{array} \\\hline \text { Fund A } & 16 \% & 1.20 & 24 \% \\\hline \text { Benchrnark } & 14 \% & 1.10 & 19 \% \\\hline \text { Fund A minus Benchrnark } & 2 \% & \text { NA } & 4 \% \\\hline \text { Treasury Security } & 3 \% & \text { NA } & \text { NA } \\\hline\end{array}$$

-The information ratio for Fund A is closest to:

A) 0.1.
B) 0.4.
C) 0.5.
D) 0.7.

Question 37

In risk management, drawdown is measured as the:

A) total outflow of funds during a period.
B) percent difference between maximum fund value and subsequent minimum value.
C) percent difference between fund and benchmark return during worst performance.
D) amount of funds needed to be invested to achieve minimum acceptable return.

Question 38

Which of the following statements about portfolio return calculation is most accurate? Time-weighted returns are best for measuring the returns of a:

A) fund manager, whereas money-weighted returns are best for a portfolio owner.
B) portfolio owner, whereas money-weighted returns are best for a fund manager.
C) fund manager, whereas money-weighted returns are no longer used in practice.
D) portfolio owner, whereas money-weighted returns are generally used in practice.

Question 39

Carl plans to add one of two alternative stocks to his portfolio. Stock A has a correlation of 0.70 with his portfolio and Stock B has a correlation of 0.10. Both stocks have the same standard deviation of returns. Based on this information, relative to Stock A, Stock B will result in:

A) more total risk and less active risk for the portfolio.
B) less total risk and more active risk for the portfolio.
C) more total risk and more active risk for the portfolio.
D) less total risk and less active risk for the portfolio.

Question 40

* Use the following information to answer the next three questions *
$$\begin{array} { | l | c | c | c | } \hline \text { Asset } & \begin{array} { c } \text { Mean Annual } \\\text { Return }\end{array} & \text { Beta } & \begin{array} { c } \text { Standard } \\\text { Devintinn }\end{array} \\\hline \text { Fund A } & 16 \% & 1.20 & 24 \% \\\hline \text { Benchrnark } & 14 \% & 1.10 & 19 \% \\\hline \text { Fund A minus Benchrnark } & 2 \% & \text { NA } & 4 \% \\\hline \text { Treasury Security } & 3 \% & \text { NA } & \text { NA } \\\hline\end{array}$$

-What is Fund A's tracking risk?

A) 2%
B) 4%
C) 5%
D) 24%

Question 41

Performance attribution seeks to determine the detailed investment style adopted by a money manager.

Question 42

Standard deviation, beta, and coefficient of determination are readily available for mutual funds from sources like Morningstar.

Question 43

The coefficient of determination, also known as R-squared, is used to denote the degree of diversification.

Question 44

Total risk of a portfolio is measured by the beta coefficient.

Question 45

The higher the Sharpe ratio, the better the risk-adjusted portfolio performance.

Question 46

Jensen's alpha is a risk-adjusted performance measure.

Question 47

Sharpe's measure is a ratio of excess return to total risk.

Question 48

The money-weighted rate of return is equivalent to the internal rate of return.

Question 49

GIPS requires compliant history for at least 10 years, or since inception, if less than 10 years.

Question 50

Investors who have all their assets in one portfolio of securities should rely on the Sharpe measure rather than the Treynor measure.

Question 51

The time-weighted rate of return is affected by any cash flows to the portfolio.

Question 52

GIPS was created to obtain global acceptance of a standard for fair presentation.

Question 53

Which method of calculating VaR is the most complicated?

A) Historical approach
B) Variance-covariance approach
C) Monte Carlo simulation approach
D) Performance attribution approach

Question 54

The purpose of performance attribution is to assess the risk of a portfolio.

Question 55

A large-cap manager that has the S&P 500 as her benchmark decides to increase her allocation to cash. What impact will this have on total risk, active risk and active share of her portfolio?

A) Total risk and active risk will decrease, and active share will increase.
B) Total risk will decrease, and active risk and active share will increase.
C) Total risk and active share will decrease, and active risk will increase.
D) Total risk, active risk and active share will all decrease.

Question 56

Jensen's measure of performance is based on the CAPM.

Question 57

The use of the Treynor measure implies that total risk is the proper measure of risk in performance evaluation.

Question 58

When evaluating the performance of a mutual fund holding several S&P 500 stocks, one should always use the S&P 500 as the benchmark.

Question 59

Modigliani-squared is a return adjusted for volatility that allows returns between portfolios to be compared.

Question 60

Treynor's measure is a ratio of excess return to systematic risk.

Question 61

The Jays Fund had a value of $88,750 on January 1, 20XX. On April 1, 20XX (first quarter) the fund had a value of $91,650 and received an inflow of $18,500. On July 1, the fund had a value of $118,150 and paid a semi-annual dividend of $6,000. Assume the dividend was not reinvested. At year-end (December 31, 20XX), the fund's value was $126,850. Calculate the money- and time-weighted returns for the fund.

Question 62

What is performance attribution?

Question 63

A $50 million portfolio reports a 5% monthly VaR of $3 million. Explain what this VaR indicates and identify the ramifications for monthly returns over the next five years.

Question 64

GIPS requirements include: uniformity in certain performance calculations and disclosures; inclusion of all actual fee-paying discretionary portfolios in composites with similar objectives; compliant history for at least 5 years, or since inception if less than 5 years.

Question 65

A retired couple's assets consist of a $100,000 house, a $400,000 securities portfolio, a $15,000 car, and personal effects. Would they be more concerned with the Sharpe measure or the Treynor measure for the portfolio?

Question 66

Value at risk (VaR) indicates the largest possible loss a manager should expect if an extreme negative event occurs.

Question 67

Consider the data for the JJ Value Fund and its benchmark the Russell Value Index. The YTM on T-bonds is 3.8%.
* * Derived as the standard deviation of active return
Find the following risk-adjusted performance measures for the JJ Fund and the Russell Index: Sharpe ratio, Treynor ratio, Sortino ratio and Information ratio.

Question 68

What are the appropriate uses of the Sharpe and the Treynor measures?

Question 69

Identify the three approaches to calculating value at risk (VaR) and identify one advantage and one disadvantage of each approach.

Question 70

Sharpe's ratio measures the slope of the line between RF and the portfolio being evaluated. If the line is plotted between RF and a market index, where would superior portfolios lie? Inferior portfolios?

Question 71

In assessing a manager's performance, his supervisor determines that his security selection contributed nothing to his outperformance i.e., all of his outperformance came from asset allocation. Does this mean the manager should not be rewarded for outperforming the benchmark?

Question 72

Discuss how constraints on portfolio managers affect the portfolio results.

Question 73

Time-weighted, as opposed to money-weighted, return captures the return actually earned by the fund manager.

Question 74

What is the major difference between the Sharpe and Treynor measures?

Question 75

What are the two approaches to perform style analysis on a portfolio? Briefly explain each.

Question 76

What are some of the problems associated with using risk-adjusted portfolio performance measures?