Question 1

In a particular year, Hoosier Mutual Fund earned a return of 1% by making the following investments in asset classes: $\begin{array}{cc}
&  \text { Weight  } & \text { Return }\
 \text { Bonds } &20\%&5\%\
 \text { Stocks } &80\%&0\%\
\end{array}$

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 contribution of selection within markets to the Hoosier Fund's total abnormal return was

Accepted Answer

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

Question 2

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.

Accepted Answer

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.

Question 3

The following data are available relating to the performance of Sooner Stock Fund and the market portfolio: $\begin{array}{lcc} 
& \text { Sooner } & \text { Market } \
&&\text { Portfolio }\
\text { Average return } & 20 \% & 11\% \
\text { Standard deviations of returns } & 44\% & 19\% \
\text { Beta } & 1.8 & 1.0 \
\text { Residual standard deviation } & 2.0 \% & 0.0 \%
\end{array}$
 The risk-free return during the sample period was 3%.
Calculate the Jensen measure of performance evaluation for Sooner Stock Fund.

Accepted Answer

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

Question 4

The M-squared measure considers

Accepted Answer

A)  only the return when evaluating mutual funds. 
B)  the risk-adjusted return when evaluating mutual funds. 
C)  only the total risk when evaluating mutual funds. 
D)  only the market risk when evaluating mutual funds. 
E)  None of the options are correct.

Question 5

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

Accepted Answer

A)  12%. 
B)  14%. 
C)  15%. 
D)  16%.

Question 6

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

Accepted Answer

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

Question 7

To determine whether portfolio performance is statistically significant requires

Accepted Answer

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 8

Suppose two portfolios have the same average return and 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

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 9

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 Sharpe 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.

Question 10

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

Question 11

Suppose you purchase one share of the stock of Mayfair 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

Accepted Answer

A)  10.0%. 
B)  8.7%. 
C)  19.7%. 
D)  17.6%.

Question 12

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

Accepted Answer

A)  11.7% and 12.5%. 
B)  12.1% and 12.5%. 
C)  12.5% and 11.7%. 
D)  12.5% and 12.1%.

Question 13

In a particular year, Hoosier Mutual Fund earned a return of 1% by making the following investments in asset classes: $\begin{array}{cc}
&  \text { Weight  } & \text { Return }\
 \text { Bonds } &20\%&5\%\
 \text { Stocks } &80\%&0\%\
\end{array}$

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 contribution of asset allocation across markets to the Hoosier Fund's total abnormal return was

Accepted Answer

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

Question 14

The dollar-weighted return on a portfolio is equivalent to

Accepted Answer

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 options are correct.

Question 15

Bad investment decisions can be made in a category of funds due to poor performing funds not being considered. This is called ___________,

Accepted Answer

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

Question 16

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. $\begin{array}{cc}
  &\text {Average ReturnResidual   } &\text { Standard Deviation  }&\text { Beta }\
 \text { Fund A } &17.6\%&10\%&1.2\
 \text {Fund B  } &17.5\%&20\%&1.0\
 \text { Fund C} &17.4\%&30\%&0.8\
\end{array}$

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).

Question 17

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

Accepted Answer

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)  portfolio durations can vary across managers and if managers follow a particular style or subgroup, portfolios may not be comparable. 
E)  All of the options are correct.

Question 18

The M2 measure was developed by

Accepted Answer

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

Question 19

Which of the following is NOT a characteristic used by Morningstar to measure performance and assign a star rating?

Accepted Answer

A)  average price-to-book value 
B)  price-earnings ratio 
C)  market capitalization 
D)  distribution of returns 
E)  All of the options are correct.

Question 20

The following data are available relating to the performance of Seminole Fund and the market portfolio: $\begin{array}{lcc} 
& \text {Seminole } & \text { Market } \ 
&&\text { Portfolio }\
\text { Average return } & 18 \% & 14\% \
\text { Standard deviations of returns } & 30\% & 22\% \
\text { Beta } & 1.4 & 1.0 \
\text { Residual standard deviation } &4.0 \% & 0.0 \%
\end{array}$

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%

Exam 24: Portfolio Performance Evaluation