Deck 24: Portfolio Performance Evaluation

Question 1

Morningstar's RAR methodI) 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

Answer 1

B

Question 2

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 concept found only in astronomy, the set of all mutual funds in the world, or the set of all mutual funds in the U.S.

Answer 2

E

Question 3

Suppose you purchase 100 shares of Coca Cola 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 Coca Cola 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 Coca Cola 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.

Answer 3

A

Question 4

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

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 5

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

Question 6

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

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 7

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

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 8

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 options are correct.

Question 9

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%.

Question 10

Henriksson (1981) 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 11

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

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 12

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 13

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

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.

Question 14

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

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 15

__________ 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) Michael Jensen, William Sharpe, and Jack Treynor

Question 16

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

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.

Question 17

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%.

Question 18

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

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 19

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 Treynor measure, the performance of Roll Tide Fund

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.

Question 20

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 21

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.

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

Question 22

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 are the data for the S&P 500 Index. $\begin{array}{cc} &\text {Average ReturnResidual } &\text { Standard Deviation }&\text { Beta }\\ \text { Fund A } &18\%&38\%&1.6\\ \text {Fund B } &15\%&27\%&1.3\\ \text { Fund C} &11\%&24\%&1.0\\\text {S\&P 500}&10\%&22\%&1.0\end{array}$


The fund with the highest Sharpe measure is

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 23

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

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

Question 24

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 information ratio for Sooner Stock Fund.

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

Question 25

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.

Question 26

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

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 27

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 are the data for the S&P 500 Index. $\begin{array}{cc} &\text {Average ReturnResidual } &\text { Standard Deviation }&\text { Beta }\\ \text { Fund A } &23\%&30\%&1.3\\ \text {Fund B } &20\%&19\%&1.2\\ \text { Fund C} &19\%&17\%&1.1\\\text {S\&P 500}&18\%&15\%&1.0\end{array}$
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 (tied for highest).

Question 28

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%.
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 29

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 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) It cannot be determind from the information given.

Question 30

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

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

Question 31

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 dollar-weighted return on your investment is

A) 10.00%.
B) 8.78%.
C) 19.71%.
D) 20.36%.

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 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

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 33

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%.

Question 34

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

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

Question 35

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%.
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 options are correct.

Question 36

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. $\begin{array}{cc} &\text {Average ReturnResidual } &\text { Standard Deviation }&\text { Beta }\\ \text { Fund A } &20\%&4.00\%&0.8\\ \text {Fund B } &21\%&1.025\%&1.0\\ \text { Fund C} &23\%&1.20\%&1.2\\\end{array}$
The fund with the highest information ratio measure is

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

Question 37

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

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 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. __________ 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.

Question 39

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 40

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%.
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 41

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.

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

Question 42

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 43

The following data are available relating to the performance of ScoonerStock Fund and the market portfolio: $\begin{array}{lcc} & \text { Scooner } & \text { Market } \\&&\text { Portfolio }\\\text { Average return } & 19 \% & 12\% \\\text { Standard deviations of returns } & 35\% & 15\% \\\text { Beta } & 1.5 & 1.0 \\\text { Residual standard deviation } & 3.0 \% & 0.0 \%\end{array}$

The risk-free return during the sample period was 6%.
Calculate the information ratio for ScoonerStock Fund.

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

Question 44

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?

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

Question 45

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

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

Question 46

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

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

Question 47

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.

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

Question 48

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.

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

Question 49

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

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

Question 50

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 Sharpe's measure of performance for Tiger Fund.

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

Question 51

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 total abnormal return on the Roll Tide managed portfolio was

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

Question 52

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.

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

Question 53

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?

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

Question 54

The following data are available relating to the performance of Scooner Stock Fund and the market portfolio: $\begin{array}{lcc} & \text { Scooner } & \text { Market } \\&&\text { Portfolio }\\\text { Average return } & 19 \% & 12\% \\\text { Standard deviations of returns } & 35\% & 15\% \\\text { Beta } & 1.5 & 1.0 \\\text { Residual standard deviation } & 3.0 \% & 0.0 \%\end{array}$
The risk-free return during the sample period was 6%.
What is the Sharpe measure of performance evaluation for Scooner Stock Fund?

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

Question 55

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 Treynor's measure of performance for Monarch Stock Fund.

A) 10.40%
B) 8.80%
C) 44.00%
D) 50.00%

Question 56

The following data are available relating to the performance of Scooner Stock Fund and the market portfolio: $\begin{array}{lcc} & \text { Scooner } & \text { Market } \\&&\text { Portfolio }\\\text { Average return } & 19 \% & 12\% \\\text { Standard deviations of returns } & 35\% & 15\% \\\text { Beta } & 1.5 & 1.0 \\\text { Residual standard deviation } & 3.0 \% & 0.0 \%\end{array}$

The risk-free return during the sample period was 6%.
Calculate the Jensen measure of performance evaluation for Scooner Stock Fund.

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

Question 57

The following data are available relating to the performance of Scooner Stock Fund and the market portfolio: $\begin{array}{lcc} & \text { Scooner } & \text { Market } \\&&\text { Portfolio }\\\text { Average return } & 19 \% & 12\% \\\text { Standard deviations of returns } & 35\% & 15\% \\\text { Beta } & 1.5 & 1.0 \\\text { Residual standard deviation } & 3.0 \% & 0.0 \%\end{array}$

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

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

Question 58

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 59

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 Jensen's measure of performance for Monarch Stock Fund.

A) 1.00%
B) 2.80%
C) 44.00%
D) 50.00%

Question 60

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

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

Question 61

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 options are correct.

Question 62

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

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

Question 63

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

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

Question 64

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) 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 65

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

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

Question 66

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) therefore, it does not matter which measure is used to evaluate a portfolio manager. However, the Sharpe and Treynor measures use different risk measures, so therefore, the measures vary as to whether or not they are appropriate, depending on the investment scenario.
E) None of the options are correct.

Question 67

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%.

Question 68

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 69

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 three stocks where the returns on the three 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 70

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 options are correct.

Question 71

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

Question 73

What method of measuring performance is similar to the mean/variance based Sharpe ratio?

A) Morningstar RAR
B) Treynor measure
C) Jensen alpha
D) Polos razor
E) None of the options are correct.

Question 74

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) 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 75

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 options are correct.

Question 76

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 77

What assumption about risk-adjusted techniques for measuring performance poses a potential problem?

A) Mean reversion
B) Portfolio risk is constant over time
C) Returns are normally distributed
D) Lognormal outcome of prices
E) None of the options are correct.

Question 78

The M-squared measure considers

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 79

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 80

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.