Deck 24: Portfolio Performance Evaluation

Question 1

Suppose two portfolios have the same average return,the same standard deviation of returns,but Buckeye Fund has a lower beta than Gator Fund.According to the Treynor measure,the performance of Buckeye Fund

A)is better than the performance of Gator Fund.
B)is the same as the performance of Gator Fund.
C)is poorer than the performance of Gator Fund.
D)cannot be measured as there is no data on the alpha of the portfolio.
E)none of the above is true.

Answer 1

A

Question 2

Suppose two portfolios have the same average return,the same standard deviation of returns,but Buckeye Fund has a lower beta than Gator Fund.According to the Sharpe measure,the performance of Buckeye Fund

A)is better than the performance of Gator Fund.
B)is the same as the performance of Gator Fund.
C)is poorer than the performance of Gator Fund.
D)cannot be measured as there is no data on the alpha of the portfolio.
E)none of the above is true.

Answer 2

B

Question 3

Suppose two portfolios have the same average return,the same standard deviation of returns,but portfolio A has a higher beta than portfolio B.According to the Sharpe measure,the performance of portfolio A __________.

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 is no data on the alpha of the portfolio
E)none of the above is true.

Answer 3

B

Question 4

Suppose two portfolios have the same average return,the same standard deviation of returns,but Buckeye Fund has a higher beta than Gator Fund.According to the Treynor measure,the performance of Buckeye Fund

A)is better than the performance of Gator Fund.
B)is the same as the performance of Gator Fund.
C)is poorer than the performance of Gator Fund.
D)cannot be measured as there is no data on the alpha of the portfolio.
E)none of the above is true.

Question 5

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

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

Question 6

Suppose two portfolios have the same average return,the same standard deviation of returns,but Aggie Fund has a lower beta than Raider Fund.According to the Treynor measure,the performance of Aggie Fund

A)is better than the performance of Raider Fund.
B)is the same as the performance of Raider Fund.
C)is poorer than the performance of Raider Fund.
D)cannot be measured as there is no data on the alpha of the portfolio.
E)none of the above is true.

Question 7

Suppose two portfolios have the same average return,the same standard deviation of returns,but Aggie Fund has a higher beta than Raider Fund.According to the Sharpe measure,the performance of Aggie Fund

A)is better than the performance of Raider Fund.
B)is the same as the performance of Raider Fund.
C)is poorer than the performance of Raider Fund.
D)cannot be measured as there is no data on the alpha of the portfolio.
E)none of the above is true.

Question 8

The comparison universe is not __________.

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)A,B,and C

Question 9

__________ did not develop a popular method for risk-adjusted performance evaluation of mutual funds.

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

Question 10

Suppose you purchase 100 shares of GM stock at the beginning of year 1,and purchase another 100 shares at the end of year 1.You sell all 200 shares at the end of year 2.Assume that the price of GM stock is $50 at the beginning of year 1,$55 at the end of year 1,and $65 at the end of year 2.Assume no dividends were paid on GM stock.Your dollar-weighted return on the stock will be __________ your time-weighted return on the stock.

A)higher than
B)the same as
C)less than
D)exactly proportional to
E)more information is necessary to answer this question

Question 11

The comparison universe is __________.

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 above

Question 12

Henriksson (1984)found that,on average,betas of funds __________ during market advances.

A)increased very significantly
B)increased slightly
C)decreased slightly
D)decreased very significantly
E)did not change

Question 13

Hedge funds
I)are appropriate as a sole investment vehicle for an investor.
II)should only be added to an already well-diversified portfolio.
III)pose performance evaluation issues due to non-linear factor exposures.
IV)have down-market betas that are typically larger than up-market betas.
V)have symmetrical betas.

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

Question 14

Suppose two portfolios have the same average return,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 __________.

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 is no data on the alpha of the portfolio
E)none of the above is true.

Question 15

Suppose two portfolios have the same average return,the same standard deviation of returns,but Buckeye Fund has a higher beta than Gator Fund.According to the Sharpe measure,the performance of Buckeye Fund

A)is better than the performance of Gator Fund.
B)is the same as the performance of Gator Fund.
C)is poorer than the performance of Gator Fund.
D)cannot be measured as there is no data on the alpha of the portfolio.
E)none of the above is true.

Question 16

Morningstar's RAR method
I)is one of the most widely used performance measures.
II)indicates poor performance by placing up to 5 darts next to the fund's name.
III)computes fund returns adjusted for loads.
IV)computes fund returns adjusted for risk.
V)produces ranking results that are the same as those produced with the Sharpe measure.

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

Question 17

Suppose two portfolios have the same average return,the same standard deviation of returns,but Aggie Fund has a higher beta than Raider Fund.According to the Treynor measure,the performance of Aggie Fund

A)is better than the performance of Raider Fund.
B)is the same as the performance of Raider Fund.
C)is poorer than the performance of Raider Fund.
D)cannot be measured as there is no data on the alpha of the portfolio.
E)none of the above is true.

Question 18

Most professionally managed equity funds generally __________.

A)outperform the S&P 500 index on both raw and risk-adjusted return measures
B)underperform the S&P 500 index on both raw and risk-adjusted return measures
C)outperform the S&P 500 index on raw return measures and underperform the S&P 500 index on risk-adjusted return measures
D)underperform the S&P 500 index on raw return measures and outperform the S&P 500 index on risk-adjusted return measures
E)match the performance of the S&P 500 index on both raw and risk-adjusted return measures

Question 19

Mutual funds show ____________ evidence of serial correlation and hedge funds show ____________ evidence of serial correlation.

A)almost no; almost no
B)almost no; substantial
C)substantial; substantial
D)substantial; almost no
E)modest; modest

Question 20

Suppose two portfolios have the same average return,the same standard deviation of returns,but portfolio A has a lower beta than portfolio B.According to the Treynor measure,the performance of portfolio A __________.

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 is no data on the alpha of the portfolio
E)none of the above is true.

Question 21

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 is the data for the S&P 500 index. $$\begin{array} { | l | l | l | l | } \hline & \text { Average Return } & \text { Standard. Deviation } & \text { Beta } \\\hline \text { Fund A } & 18 \% & 38 \% & 1.6 \\\hline \text { Fund B } & 15 \% & 27 \% & 1.3 \\\hline \text { Fund C } & 11 \% & 24 \% & 1.0 \\\hline \text { S\&P 500 } & 10 \% & 22 \% & 1.0 \\\hline\end{array}$$ The fund with the highest Sharpe measure is __________.

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

Question 22

Suppose you purchase one share of the stock of Volatile Engineering Corporation at the beginning of year 1 for $36.At the end of year 1,you receive a $2 dividend,and buy one more share for $30.At the end of year 2,you receive total dividends of $4 (i.e.,$2 for each share),and sell the shares for $36.45 each.The dollar-weighted return on your investment is _______.

A)-1.75%
B)4.08%
C)8.53%
D)8.00%
E)12.35%

Question 23

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. $$\begin{array} { | l | l | l | l | } \hline & \text { Average Return } & \text { Standard. Deviation } & \text { Beta } \\\hline \text { Fund } \mathrm { A } & 17.6 \% & 10 ^ { \circ } \% & 1.2 \\\hline \text { Fund B } & 17.5 ^ { \circ } \% & 20 ^ { \circ } \% & 1.0 \\\hline \text { Fund C } & 17.4 ^ { \circ } \% & 30 ^ { \circ } \% & 0.8 \\\hline\end{array}$$ The fund with the highest Jensen measure is __________.

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

Question 24

Suppose you purchase one share of the stock of Volatile Engineering Corporation at the beginning of year 1 for $36.At the end of year 1,you receive a $2 dividend,and buy one more share for $30.At the end of year 2,you receive total dividends of $4 (i.e.,$2 for each share),and sell the shares for $36.45 each.The time-weighted return on your investment is ________.

A)-1.75%
B)4.08%
C)8.53%
D)11.46%
E)12.35%

Question 25

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

A)12.3%
B)10.4%
C)15.1%
D)16.7%
E)none of the above

Question 26

You want to evaluate three mutual funds using the Sharpe measure for performance evaluation.The risk-free return during the sample period is 5%.The average returns,standard deviations and betas for the three funds are given below,as is the data for the S&P 500 index. $$\begin{array} { | l | l | l | l | } \hline & \text { Average Return } & \text { Standard. Deviation } & \text { Beta } \\\hline \text { Fund A } & 23 \% & 30 \% & 1.3 \\\hline \text { Fund B } & 20 \% & 19 \% & 1.2 \\\hline \text { Fund C } & 19 \% & 17 \% & 1.1 \\\hline \text { S\&P 500 } & 18 \% & 15 \% & 1.0 \\\hline\end{array}$$ The investment with the highest Sharpe measure is __________.

A)Fund A
B)Fund B
C)Fund C
D)the index
E)Funds A and C are tied for highest

Question 27

Suppose you own two stocks,A and B.In year 1,stock A earns a 2% return and stock B earns a 9% return.In year 2,stock A earns an 18% return and stock B earns an 11% return.__________ has the higher arithmetic average return.

A)Stock A
B)Stock B
C)The two stocks have the same arithmetic average return
D)At least three periods are needed to calculate the arithmetic average return
E)None of the above

Question 28

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

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

Question 29

Suppose the risk-free return is 6%.The beta of a managed portfolio is 1.5,the alpha is 3%,and the average return is 18%.Based on Jensen's measure of portfolio performance,you would calculate the return on the market portfolio as

A)12%
B)14%
C)15%
D)16%
E)none of the above

Question 30

Suppose the risk-free return is 4%.The beta of a managed portfolio is 1.2,the alpha is 1%,and the average return is 14%.Based on Jensen's measure of portfolio performance,you would calculate the return on the market portfolio as

A)11.5%
B)14%
C)15%
D)16%
E)none of the above

Question 31

Calculate the Jensen measure of performance evaluation for Sooner Stock Fund.

A)2.6%
B)4.00%
C)8.67%
D)31.43%
E)37.14%

Question 32

You want to evaluate three mutual funds using the Sharpe 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,as is the data for the S&P 500 index. $$\begin{array} { | l | l | l | l | } \hline & \text { Average Return } & \text { Standard. Deviation } & \text { Beta } \\\hline \text { Fund A } & 24 \% & 30 \% & 1.5 \\\hline \text { Fund B } & 12 \% & 10 \% & 0.5 \\\hline \text { Fund C } & 22 \% & 20 \% & 1.0 \\\hline \text { S\&P 500 } & 18 \% & 16 \% & 1.0 \\\hline\end{array}$$ The fund with the highest Sharpe measure is __________.

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

Question 33

What is the Treynor measure of performance evaluation for Sooner Stock Fund?

A)1.33%
B)4.00%
C)8.67%
D)9.44%
E)37.14%

Question 34

You want to evaluate three mutual funds using the information ratio measure for performance evaluation.The risk-free return during the sample period is 6%,and the average return on the market portfolio is 19%.The average returns,residual standard deviations,and betas for the three funds are given below. $$\begin{array} { | l | l | l | l | } \hline & \text { Average Return } & \text { Residual Standard Deviation } & \text { Beta } \\\hline \text { Fund A } & 20 \% & 4.00 \% & 0.8 \\\hline \text { Fund B } & 21 \% & 1.25 \% & 1.0 \\\hline \text { Fund C } & 23 \% & 1.20 \% & 1.2 \\\hline\end{array}$$ The fund with the highest information ratio measure is __________.

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

Question 35

What is the Sharpe measure of performance evaluation for Sooner Stock Fund?

A)1.33%
B)4.00%
C)8.67%
D)38.6%
E)37.14%

Question 36

Suppose a particular investment earns an arithmetic return of 10% in year 1,20% in year 2 and 30% in year 3.The geometric average return for the year period will be __________.

A)greater than the arithmetic average return
B)equal to the arithmetic average return
C)less than the arithmetic average return
D)equal to the market return
E)cannot tell from the information given

Question 37

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. $$\begin{array} { | l | l | l | l | } \hline & \text { Average Return } & \text { Standard. Deviation } & \text { Beta } \\\hline \text { Fund A } & 13 \% & 10 \% & 0.5 \\\hline \text { Fund B } & 19 \% & 20 \% & 1.0 \\\hline \text { Fund C } & 25 \% & 30 \% & 1.5 \\\hline \text { S\&P 500 } & 18 \% & 16 \% & 1.0 \\\hline\end{array}$$ The fund with the highest Treynor measure is __________.

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

Question 38

Suppose you own two stocks,A and B.In year 1,stock A earns a 2% return and stock B earns a 9% return.In year 2,stock A earns an 18% return and stock B earns an 11% return.Which stock has the higher geometric average return?

A)Stock A
B)Stock B
C)The two stocks have the same geometric average return
D)At least three periods are needed to calculate the geometric average return
E)None of the above
The following data are available relating to the performance of Sooner Stock Fund and the market portfolio: $$\begin{array} { | l | l | l | } \hline & \text { Sooner } & \text { Market Portfolio } \\\hline \text { Average Return } & 20 \% & 11 \% \\\hline \text { Standard Deviation of Returns } & 44 ^ { \circ } \% & 19 \% \\\hline \text { Beta } & 1.8 & 1.0 \\\hline \text { Residual standard deviation } & 2.0 \% & 0.0 \% \\\hline\end{array}$$ The risk-free return during the sample period was 3%.

Question 39

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 time-weighted return on your investment is __________.

A)10.0%
B)8.7%
C)19.7%
D)17.6%
E)none of the above

Question 40

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 __________.

A)10.00%
B)8.78%
C)19.71
D)20.36%
E)none of the above

Question 41

Calculate Jensen's measure of performance for Monarch Stock Fund.

A)1.00%
B)2.80%
C)44.00%
D)50.00%
E)none of the above

Question 42

The following data are available relating to the performance of Long Horn Stock Fund and the market portfolio: $$\begin{array} { | l | l | l | } \hline & \text { Long Horn } & \text { Market Portfolio } \\\hline \text { Average Return } & 19 \% & 12 \% \\\hline \text { Standard Deviation of Returns } & 35 \% & 15 \% \\\hline \text { Beta } & 1.5 & 1.0 \\\hline \text { Residual standard deviation } & 3.0 \% & 0.0 \% \\\hline\end{array}$$ The risk-free return during the sample period was 6%.

-Calculate the Jensen measure of performance evaluation for Long Horn Stock Fund.

A)1.33%
B)4.00%
C)8.67%
D)31.43%
E)37.14%

Question 43

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

-The contribution of selection within markets to the Razorback Fund's total excess return was __________.

A)-1.80%
B)-1.00%
C)0.80%
D)1.00%
E)none of the above

Question 44

The following data are available relating to the performance of Monarch Stock Fund and the market portfolio: $$\begin{array} { | l | l | l | } \hline & \text { Monarch } & \text { Market Portfolio } \\\hline \text { Average Return } & 16 \% & 12 \% \\\hline \text { Standard Deviation of Returns } & 26 \% & 22 \% \\\hline \text { Beta } & 1.15 & 1.00 \\\hline \text { Residual Standard Deviation } & 1 \% & 0 \% \\\hline\end{array}$$ The risk-free return during the sample period was 4%.

-Calculate Treynor's measure of performance for Monarch Stock Fund.

A)10.40%
B)8.80%
C)44.00%
D)50.00%
E)none of the above

Question 45

The following data are available relating to the performance of Wildcat Fund and the market portfolio: $$\begin{array} { | l | l | l | } \hline & \text { Wildeat } & \text { Market Portfolio } \\\hline \text { Average Return } & 18 \% & 15 \% \\\hline \text { Standard Deviation of Returns } & 25 \% & 20 \% \\\hline \text { Beta } & 1.25 & 1.00 \\\hline \text { Residual Standard Deviation } & 2 \% & 0 \% \\\hline\end{array}$$ The risk-free return during the sample period was 7%.

-Calculate Sharpe's measure of performance for Wildcat Fund.

A)1.00%
B)8.80%
C)44.00%
D)50.00%
E)none of the above

Question 46

The following data are available relating to the performance of Seminole Fund and the market portfolio: $$\begin{array} { | l | l | l | } \hline & \text { Seminole } & \text { Market Portfolio } \\\hline \text { Average Return } & 18 \% & 14 \% \\\hline \text { Standard Deviation of Returns } & 30 \% & 22 ^ { \circ } \% \\\hline \text { Beta } & 1.4 & 1.0 \\\hline \text { Residual standard deviation } & 4.0 \% & 0.0 \% \\\hline\end{array}$$ The risk-free return during the sample period was 6%.

-If you wanted to evaluate the Seminole Fund using the M² measure,what percent of the adjusted portfolio would need to be invested in T-Bills?

A)-36% (borrow)
B)50%
C)8%
D)36%
E)27%

Question 47

The following data are available relating to the performance of Wildcat Fund and the market portfolio: $$\begin{array} { | l | l | l | } \hline & \text { Wildeat } & \text { Market Portfolio } \\\hline \text { Average Return } & 18 \% & 15 \% \\\hline \text { Standard Deviation of Returns } & 25 \% & 20 \% \\\hline \text { Beta } & 1.25 & 1.00 \\\hline \text { Residual Standard Deviation } & 2 \% & 0 \% \\\hline\end{array}$$ The risk-free return during the sample period was 7%.

-Calculate Jensen's measure of performance for Wildcat Fund.

A)1.00%
B)8.80%
C)44.00%
D)50.00%
E)none of the above

Question 48

Calculate the M² measure for the Seminole Fund.

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

Question 49

The following data are available relating to the performance of Long Horn Stock Fund and the market portfolio: $$\begin{array} { | l | l | l | } \hline & \text { Long Horn } & \text { Market Portfolio } \\\hline \text { Average Return } & 19 \% & 12 \% \\\hline \text { Standard Deviation of Returns } & 35 \% & 15 \% \\\hline \text { Beta } & 1.5 & 1.0 \\\hline \text { Residual standard deviation } & 3.0 \% & 0.0 \% \\\hline\end{array}$$ The risk-free return during the sample period was 6%.

-Calculate the information ratio for Long Horn Stock Fund.

A)1.33
B)4.00
C)8.67
D)31.43
E)37.14

Question 50

The following data are available relating to the performance of Monarch Stock Fund and the market portfolio: $$\begin{array} { | l | l | l | } \hline & \text { Monarch } & \text { Market Portfolio } \\\hline \text { Average Return } & 16 \% & 12 \% \\\hline \text { Standard Deviation of Returns } & 26 \% & 22 \% \\\hline \text { Beta } & 1.15 & 1.00 \\\hline \text { Residual Standard Deviation } & 1 \% & 0 \% \\\hline\end{array}$$ The risk-free return during the sample period was 4%.

-Calculate Sharpe's measure of performance for Monarch Stock Fund.

A)1.00%
B)46.00%
C)44.00%
D)50.00%
E)none of the above

Question 51

The following data are available relating to the performance of Long Horn Stock Fund and the market portfolio: $$\begin{array} { | l | l | l | } \hline & \text { Long Horn } & \text { Market Portfolio } \\\hline \text { Average Return } & 19 \% & 12 \% \\\hline \text { Standard Deviation of Returns } & 35 \% & 15 \% \\\hline \text { Beta } & 1.5 & 1.0 \\\hline \text { Residual standard deviation } & 3.0 \% & 0.0 \% \\\hline\end{array}$$ The risk-free return during the sample period was 6%.

-What is the Treynor measure of performance evaluation for Long Horn Stock Fund?

A)1.33%
B)4.00%
C)8.67%
D)31.43%
E)37.14%

Question 52

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

-The contribution of asset allocation across markets to the Razorback Fund's total excess return was __________.

A)-1.80%
B)-1.00%
C)0.80%
D)1.00%
E)none of the above

Question 53

The following data are available relating to the performance of Long Horn Stock Fund and the market portfolio: $$\begin{array} { | l | l | l | } \hline & \text { Long Horn } & \text { Market Portfolio } \\\hline \text { Average Return } & 19 \% & 12 \% \\\hline \text { Standard Deviation of Returns } & 35 \% & 15 \% \\\hline \text { Beta } & 1.5 & 1.0 \\\hline \text { Residual standard deviation } & 3.0 \% & 0.0 \% \\\hline\end{array}$$ The risk-free return during the sample period was 6%.

-What is the Sharpe measure of performance evaluation for Long Horn Stock Fund?

A)1.33%
B)4.00%
C)8.67%
D)31.43%
E)37.14%

Question 54

If an investor has a portfolio that has constant proportions in T-bills and the market portfolio,the portfolio's characteristic line will plot as a line with ___________; if the investor can time bull markets,the characteristic line will plot as a line with ___________.

A)a positive slope; a negative slope
B)a negative slope; a positive slope
C)a constant slope; a negative slope
D)a negative slope; a constant slope
E)a constant slope; a positive slope

Question 55

Studies of style analysis have found that ________ of fund returns can be explained by asset allocation alone.

A)between 50% and 70%
B)less than 10%
C)between 40 and 50%
D)between 75% and 90%
E)over 90%

Question 56

The following data are available relating to the performance of Wildcat Fund and the market portfolio: $$\begin{array} { | l | l | l | } \hline & \text { Wildeat } & \text { Market Portfolio } \\\hline \text { Average Return } & 18 \% & 15 \% \\\hline \text { Standard Deviation of Returns } & 25 \% & 20 \% \\\hline \text { Beta } & 1.25 & 1.00 \\\hline \text { Residual Standard Deviation } & 2 \% & 0 \% \\\hline\end{array}$$ The risk-free return during the sample period was 7%.

-Calculate Treynor's measure of performance for Wildcat Fund.

A)1.00%
B)8.80%
C)44.00%
D)50.00%
E)none of the above

Question 57

The following data are available relating to the performance of Monarch Stock Fund and the market portfolio: $$\begin{array} { | l | l | l | } \hline & \text { Monarch } & \text { Market Portfolio } \\\hline \text { Average Return } & 16 \% & 12 \% \\\hline \text { Standard Deviation of Returns } & 26 \% & 22 \% \\\hline \text { Beta } & 1.15 & 1.00 \\\hline \text { Residual Standard Deviation } & 1 \% & 0 \% \\\hline\end{array}$$ The risk-free return during the sample period was 4%.

-What is the information ratio measure of performance evaluation for Monarch Stock Fund?

A)1.00%
B)280.00%
C)44.00%
D)50.00%
E)none of the above

Question 58

The following data are available relating to the performance of Wildcat Fund and the market portfolio: $$\begin{array} { | l | l | l | } \hline & \text { Wildeat } & \text { Market Portfolio } \\\hline \text { Average Return } & 18 \% & 15 \% \\\hline \text { Standard Deviation of Returns } & 25 \% & 20 \% \\\hline \text { Beta } & 1.25 & 1.00 \\\hline \text { Residual Standard Deviation } & 2 \% & 0 \% \\\hline\end{array}$$ The risk-free return during the sample period was 7%.

-What is the information ratio measure of performance evaluation for Wildcat Fund?

A)1.00%
B)8.80%
C)44.00%
D)50.00%
E)none of the above

Question 59

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

-The total excess return on the Razorback Fund's managed portfolio was __________.

A)-1.80%
B)-1.00%
C)0.80%
D)1.00%
E)none of the above

Question 60

The following data are available relating to the performance of Monarch Stock Fund and the market portfolio: $$\begin{array} { | l | l | l | } \hline & \text { Sooner } & \text { Market Portfolio } \\\hline \text { Average Return } & 20 \% & 11 \% \\\hline \text { Standard Deviation of Returns } & 44 ^ { \circ } \% & 19 \% \\\hline \text { Beta } & 1.8 & 1.0 \\\hline \text { Residual standard deviation } & 2.0 \% & 0.0 \% \\\hline\end{array}$$ The risk-free return during the sample period was 4%.

-Calculate the information ratio for Sooner Stock Fund.

A)1.53
B)1.30
C)8.67
D)31.43
E)37.14

Question 61

A pension fund that begins with $500,000 earns 15% the first year and 10% the second year.At the beginning of the second year,the sponsor contributes another $300,000.The dollar-weighted and time-weighted rates of return,respectively,were

A)11.7% and 12.5%
B)12.1% and 12.5%
C)12.5% and 11.7%
D)12.5% and 12.1%
E)none of the above

Question 62

In measuring the comparative performance of different fund managers,the preferred method of calculating rate of return is __________.

A)internal rate of return
B)arithmetic average
C)dollar-weighted
D)time-weighted
E)none of the above

Question 63

The M-squared measure

A)considers only the return when evaluating mutual funds.
B)considers the risk-adjusted return when evaluating mutual funds.
C)considers only the total risk when evaluating mutual funds.
D)considers only the market risk when evaluating mutual funds.
E)none of the above.

Question 64

The dollar-weighted return on a portfolio is equivalent to

A)the time-weighted return.
B)the geometric average return.
C)the arithmetic average return.
D)the portfolio's internal rate of return.
E)none of the above.

Question 65

To determine whether portfolio performance is statistically significant requires

A)a very long observation period due to the high variance of stock returns.
B)a short observation period due to the high variance of stock returns.
C)a very long observation period due to the low variance of stock returns.
D)a short observation period due to the low variance of stock returns.
E)a low variance of returns over any observation period.

Question 66

Define and discuss the Sharpe,Treynor,and Jensen measures of portfolio performance evaluation,and the situations in which each measure is the most appropriate measure.

Question 67

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

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)A and B.
E)none of the above.

Question 68

A portfolio manager's ranking within a comparison universe may not provide a good measure of performance because

A)portfolio returns may not be calculated in the same way.
B)portfolio durations can vary across managers.
C)if managers follow a particular style or subgroup,portfolios may not be comparable.
D)both B and C.
E)all of the above.

Question 69

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

A)Sharpe measure
B)Treynor measure
C)Jensen measure
D)information ratio
E)none of the above

Question 70

The geometric average rate of return is based on

A)the market's volatility.
B)the concept of expected return.
C)the standard deviation of returns.
D)the CAPM.
E)the principle of compounding.

Question 71

The Sharpe,Treynor,and Jensen portfolio performance measures are derived from the CAPM,

A)therefore,it does not matter which measure is used to evaluate a portfolio manager.
B)however,the Sharpe and Treynor measures use different risk measures,therefore the measures vary as to whether or not they are appropriate,depending on the investment scenario.
C)therefore,all measure the same attributes.
D)A and B.
E)none of the above.

Question 72

The Jensen portfolio evaluation measure

A)is a measure of return per unit of risk,as measured by standard deviation.
B)is an absolute measure of return over and above that predicted by the CAPM.
C)is a measure of return per unit of risk,as measured by beta.
D)A and B.
E)B and C.

Question 73

What is the problem with using the Sharpe measure for evaluation of an active portfolio management strategy?

Question 74

The Value Line Index is an equally weighted geometric average of the returns of about 1,700 firms.The value of an index based on the geometric average returns of 3 stocks where the returns on the 3 stocks during a given period were 32%,5%,and -10%,respectively,is __________.

A)4.3%
B)7.6%
C)9.0%
D)13.4%
E)5.0%

Question 75

The M² measure was developed by

A)Merton and Miller.
B)Miller and Miller.
C)Modigliani and Miller.
D)Modigliani and Modigliani.
E)the M&M Mars Company.

Question 76

The Modigliani M² measure and the Treynor T² measure

A)are identical.
B)are nearly identical and will rank portfolios the same way.
C)are nearly identical but might rank portfolios differently.
D)are somewhat different; M² can be used to rank portfolios but T² cannot.
E)are somewhat different; T² can be used to rank portfolios but M² cannot.

Question 77

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.

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 78

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

-The total excess return on the Aggie managed portfolio was __________.

A)1%
B)3%
C)4%
D)5%
E)none of the above

Question 79

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

-The contribution of asset allocation across markets to the total excess return was

A)1%
B)3%
C)4%
D)5%
E)none of the above

Question 80

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

-The contribution of selection within markets to total excess return was

A)1%
B)3%
C)4%
D)5%
E)none of the above