Question 1

Suppose two portfolios have the same average return and 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

Accepted Answer

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 are no data on the alpha of the portfolio. 
E)  None of the options

Question 2

Most professionally managed equity funds generally

Accepted Answer

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 3

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%.

Question 4

Suppose two portfolios have the same average return and 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

Accepted Answer

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 are no data on the alpha of the portfolio.

Question 5

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 6

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 7

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 8

________ did not develop 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)  Eugene Fama and Michael Jensen

Question 9

In a particular year, Aggie Mutual Fund earned a return of 15% by making the following investments in the following asset classes:

The return on a bogey portfolio was 10%, calculated as follows:

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

Accepted Answer

A)  1%. 
B)  3%. 
C)  4%. 
D)  5%. 
E)  6%

Question 10

Suppose two portfolios have the same average return and 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

Accepted Answer

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 are no data on the alpha of the portfolio.

Question 11

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

Accepted Answer

A)  11.5%. 
B)  14%. 
C)  15%. 
D)  16%.

Question 12

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 13

The following data are available relating to the performance of Long Horn Stock Fund and the market portfolio:

The risk-free return during the sample period was 6%.
What is the Treynor measure of performance evaluation for Long Horn Stock Fund?

Accepted Answer

A)  0.0133 
B)  0.04 
C)  0.0867 
D)  0.3143 
E)  0.3714

Question 14

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.

Accepted Answer

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 15

Henriksson (1984) 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 16

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

Accepted Answer

A)  internal rate of return. 
B)  arithmetic average. 
C)  dollar weighted. 
D)  time weighted. 
E)  None of the options are correct.

Question 17

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 18

The following data are available relating to the performance of Monarch Stock Fund and the market portfolio:

The risk-free return during the sample period was 4%.
What is the information ratio measure of performance evaluation for Monarch Stock Fund?

Accepted Answer

A)  1.00% 
B)  280.00% 
C)  44.00% 
D)  50.00% 
E)  None of the options are correct.

Exam 18: Evaluating Investment Performance