Question 1

Suppose you purchase one share of the stock of VM 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

Accepted Answer

A)   −1.75%.
B)   4.08%.
C)   6.74%.
D)   11.46%.
E)   12.35%. C

Question 2

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%. C

Question 3

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

Accepted Answer

A)   is better than the performance of Arc Fund.
B)   is the same as the performance of Arc Fund.
C)   is poorer than the performance of Arc Fund.
D)   cannot be measured as there are no data on the alpha of the portfolio. B

Question 4

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.

Question 5

The following data are available relating to the performance of Tiger Fund and the market portfolio: $\begin{array}{lcc} 
& \text {Tiger } & \text { Market } \  
&&\text { Portfolio }\
\text { Average return } & 18 \% & 15\% \
\text { Standard deviations of returns } & 25\% & 20\% \
\text { Beta } & 1.25 & 1.00 \
\text { Residual standard deviation } &2 \% & 0 \%
\end{array}$ 
 The risk-free return during the sample period was 7%.
Calculate Treynor's measure of performance for Tiger Fund.

Accepted Answer

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

Question 6

The following data are available relating to the performance of Tiger Fund and the market portfolio: $\begin{array}{lcc} 
& \text {Tiger } & \text { Market } \  
&&\text { Portfolio }\
\text { Average return } & 18 \% & 15\% \
\text { Standard deviations of returns } & 25\% & 20\% \
\text { Beta } & 1.25 & 1.00 \
\text { Residual standard deviation } &2 \% & 0 \%
\end{array}$ 
 The risk-free return during the sample period was 7%.
Calculate Jensen's measure of performance for Tiger Fund.

Accepted Answer

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

Question 7

The following data are available relating to the performance of Monarch Stock Fund and the market portfolio: $\begin{array}{lcc} 
& \text { Monarch } & \text { Market } \ 
&&\text { Portfolio }\
\text { Average return } & 16 \% & 12\% \
\text { Standard deviations of returns } & 26\% & 22\% \
\text { Beta } & 1.15 & 1.00 \
\text { Residual standard deviation } &1 \% & 0 \%
\end{array}$
 The risk-free return during the sample period was 4%.
Calculate Sharpe's measure of performance for Monarch Stock Fund.

Accepted Answer

A)   1%
B)   46%
C)   44%
D)   50%
E)   None of the options are correct.

Question 8

The Modigliani M2 measure and the Treynor T2 measure

Accepted Answer

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 9

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

Accepted Answer

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

Question 10

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

The risk-free return during the sample period was 7%.
What is the information ratio measure of performance evaluation for Tiger Fund?

Accepted Answer

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

Question 11

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.

Question 12

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.

Question 13

Investing in a mutual fund because of positive historical performance is a form of ___________,

Accepted Answer

A)   trend analysis.
B)   fundamental analysis.
C)   portfolio bias.
D)   selection bias.
E)   None of the options are correct.

Question 14

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

Accepted Answer

A)   is better than the performance of Wild Cat Fund.
B)   is the same as the performance of Wild Cat Fund.
C)   is poorer than the performance of Wild Cat Fund.
D)   cannot be measured as there are no data on the alpha of the portfolio.
E)   None of the options are correct.

Question 15

Suppose you purchase one share of the stock of VM 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

Accepted Answer

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

Question 16

Henriksson (1981) found that, on average, betas of funds __________ during market advances.

Accepted Answer

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

Question 17

In a particular year, Roll Tide Mutual Fund earned a return of 15% by making the following investments in the following asset classes: $\begin{array}{cc}
&  \text { Weight  } & \text { Return }\
 \text { Bonds } &10\%&6\%\
 \text { Stocks } &90\%&16\%\
\end{array}$

The return on a bogey portfolio was 10%, calculated as follows:
$\begin{array}{cc}
&  \text { Weight  } & \text { Return }\
 \text { Bonds (Lehman Brother Index) } &50\%&5\%\
 \text { Stacks (S\&P 500 Index) } &50\%&15\%\
\end{array}$

The contribution of selection within markets to total abnormal return was

Accepted Answer

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

Question 18

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 are the data for the S&P 500 Index. $\begin{array}{cc}
  &\text {Average ReturnResidual   } &\text { Standard Deviation  }&\text { Beta }\
 \text { Fund A } &24\%&30\%&1.5\
 \text {Fund B  } &12\%&10\%&0.5\
 \text { Fund C} &22\%&20\%&1.0\
\text {S\&P 500}&18\%&16\%&1.0
\end{array}$

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) .

Question 19

In a particular year, Roll Tide Mutual Fund earned a return of 15% by making the following investments in the following asset classes: $\begin{array}{cc}
&  \text { Weight  } & \text { Return }\
 \text { Bonds } &10\%&6\%\
 \text { Stocks } &90\%&16\%\
\end{array}$

The return on a bogey portfolio was 10%, calculated as follows:
$\begin{array}{cc}
&  \text { Weight  } & \text { Return }\
 \text { Bonds (Lehman Brother Index) } &50\%&5\%\
 \text { Stacks (S\&P 500 Index) } &50\%&15\%\
\end{array}$

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

Accepted Answer

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

Question 20

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

The total abnormal return on the Hoosier Fund's managed portfolio was

Accepted Answer

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

Exam 24: Portfolio Performance Evaluation

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

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

The Modigliani M² measure and the Treynor T² measure

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

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

Investing in a mutual fund because of positive historical performance is a form of ___________,

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

Henriksson (1981) found that, on average, betas of funds __________ during market advances.