Performance Evaluation and Active Portfolio Management

1. For the period 1926 to 2001, __________ had the highest standard deviation of
returns of the alternatives available.

a.
common stocks of large firms

b.
common stocks of small firms

c.
long-term treasury bonds

d.
U.S. treasury bills

2. The comparison universe is __________.

a.
a concept only found in astronomy

b.
a set of mutual funds with similar risk characteristics to your mutual
fund

c.
the set of all mutual funds in the U.S.A.

d.
the set of all mutual funds in the world

3. For the period 1926 to 2001, __________ had the lowest arithmetic average
returns of the alternatives available.

a.
common stocks of large firms

b.
common stocks of small firms

c.
long-term treasury bonds

d.
U.S. treasury bills

4. __________ did not develop a popular method for risk-adjusted performance

evaluation of mutual funds.

a.
Michael Jensen

b.
Myron Scholes

c.
William Sharpe

d.
Jack Treynor

5. For the period 1926 to 2001, __________ had the highest geometric average
returns of the alternatives available.

a.
common stocks of large firms

b.
common stocks of small firms

c.
long-term treasury bonds

d.
U.S. treasury bills

6. Your return will generally be higher using the __________ if you time your
transactions poorly and your return will generally be higher using the
__________ if you time your transactions well.

a.
dollar-weighted return method, dollar-weighted return method

b.
dollar-weighted return method, time-weighted return method

c.
time-weighted return method, dollar-weighted return method

d.
time-weighted return method, time-weighted return method

7. Consider the Sharpe and Treynor performance measures. When a pension fund
is large and has many managers, the __________ measure is better for
evaluating individual managers while the __________ measure is better for
evaluating the manager of a small fund with only one manager responsible for
all investments.

a.
Sharpe, Sharpe

b.
Sharpe, Treynor

c.
Treynor, Sharpe

d.
Treynor, Treynor

8. Henriksson found that, on average, betas of funds __________ during market

advances.

a.
decreased slightly

b.
decreased very significantly

c.
increased slightly

d.
increased very significantly

9. Suppose two portfolios have the same average return, the same standard
deviation of return, 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 since there is no data on the alpha of the portfolio

10. Most professionally managed equity funds __________.

a.
outperform the S&P 500 index on both raw and risk-adjusted return measures

b.
outperform the S&P 500 index on raw return measures and underperform the
S&P 500 index on risk-adjusted return measures

c.
underperform the S&P 500 index on both raw and 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

11. The average returns, standard deviations and betas for three funds and the
S&P500 are given below. The risk free rate is 4%.

Reference: Ref. 19-1

What is the T2 measure for portfolio A?

a.

-0.17%

b.
0.55%

c.
0.91%

d.
3.64%

12. The average returns, standard deviations and betas for three funds and the
S&P500 are given below. The risk free rate is 4%.

Reference: Ref. 19-1

What is the M2 measure for portfolio B?

a.
0.4%

b.
1.2%

c.
1.7%

d.
indeterminable

13. The average returns, standard deviations and betas for three funds and the
S&P500 are given below. The risk free rate is 4%.

Reference: Ref. 19-1

Based on the T2 measure, portfolio ______ is preferred.

a.
A

b.
B

c.
C

d.
indeterminable

14. The average returns, standard deviations and betas for three funds and the
S&P500 are given below. The risk free rate is 4%.

Reference: Ref. 19-1

Based on the M2 measure, portfolio ______ is preferred.

a.
A

b.
B

c.
C

d.
indeterminable

15. ___ is based solely on macroeconomic factors.

a.
Security selection

b.
Active portfolio management

c.
Market efficiency

d.

Market timing

16. Based on the example used by Professor Robert Merton, a perfect market timer
would have outperformed the market by __ of dollars on a $1,000 investment
made in 1927 and ending in 1978.

a.
hundreds

b.
thousands

c.
millions

d.
billions

17. The average returns, standard deviations and betas for three funds are given
below along with data for the S&P 500 index. The riskfree return during the
sample period is 6%.

Reference: Ref. 19-2

You wish to evaluate the three mutual funds using the Sharpe measure for
performance evaluation. The fund with the highest Sharpe measure of
performance is __________.

a.

Fund A

b.
Fund B

c.
Fund C

d.
indeterminable

18. The average returns, standard deviations and betas for three funds are given
below along with data for the S&P 500 index. The riskfree return during the
sample period is 6%.

Reference: Ref. 19-2

You wish to evaluate the three mutual funds using the Treynor measure for
performance evaluation. The fund with the highest Treynor measure of
performance is __________.

a.
Fund A

b.
Fund B

c.

Fund C

d.
indeterminable

19. The average returns, standard deviations and betas for three funds are given
below along with data for the S&P 500 index. The riskfree return during the
sample period is 6%.

Reference: Ref. 19-2

You wish to evaluate the three mutual funds using the Jensen measure for
performance evaluation. The fund with the lowest Jensen measure of
performance is __________.

a.
Fund A

b.
Fund B

c.
Fund C

d.
indeterminable

20.
In a particular year, Salmon Arm Mutual Fund earned a return of 16% by

making the following investments in asset classes:

The return on a bogey portfolio was 12%, calculated as follows:

Reference: Ref. 19-3

The total excess return on the managed portfolio was __________.

a.
2%

b.
3%

c.
4%

d.
5%

21.
In a particular year, Salmon Arm Mutual Fund earned a return of 16% by
making the following investments in asset classes:

The return on a bogey portfolio was 12%, calculated as follows:

Reference: Ref. 19-3

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

a.
1.5%

b.
2.0%

c.
2.5%

d.
3.5%

22.
In a particular year, Salmon Arm Mutual Fund earned a return of 16% by
making the following investments in asset classes:

The return on a bogey portfolio was 12%, calculated as follows:

Reference: Ref. 19-3

The contribution of security selection within asset classes to the total excess
return was __________.

a.

1.5%

b.
2.0%

c.
2.5%

d.
3.5%

23. In a particular year, Lost Hope Mutual Fund earned a return of 2% by making
the following investments in asset classes:

The return on a bogey portfolio was 7.5%, calculated as follows:

Reference: Ref. 19-4

The total excess return on the managed portfolio was __________.

a.
-5.5%

b.
-4.0%

c.

-3.5%

d.
5.5%

24. In a particular year, Lost Hope Mutual Fund earned a return of 2% by making
the following investments in asset classes:

The return on a bogey portfolio was 7.5%, calculated as follows:

Reference: Ref. 19-4

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

a.
-5.5%

b.
-4.0%

c.
-3.5%

d.
5.5%

25. In a particular year, Lost Hope Mutual Fund earned a return of 2% by making
the following investments in asset classes:

The return on a bogey portfolio was 7.5%, calculated as follows:

Reference: Ref. 19-4

The contribution of security selection within asset classes to the total excess
return was __________.

a.
-5.5%

b.
-4.0%

c.
-3.5%

d.
5.5%

26. _______________ averaging is the preferred method of constructing returns

series for use in evaluating portfolio performance.

a.
Time-weighted

b.
Arithmetic average

c.
Dollar-weighted

d.
Internal

27. The __________ measures the reward to risk trade-off by dividing the average
portfolio excess return by the portfolio beta.

a.
Sharpe measure

b.
Treynor measure

c.
Jensen measure

d.
appraisal ratio

28. According to Malkiel and Metcalf, much of the success of professional stock
pickers can be explained by ____________.

a.
superior skill

b.
inside information

c.
an announcement effect

d.
None of the above

29. The M2 measure of portfolio performance was developed by ______________.

a.
Modigliani and Miller

b.
Modigliani and Modigliani

c.
Merton and Miller

d.
Fama and French

30. The M2 approach to portfolio performance evaluation involves standardizing the

risk of the portfolio by __________________.

a.
including T-bills

b.
using risk-free borrowing

c.
deducting the risk-free rate

d.
More than one of the above

31. Perfect timing ability is equivalent to having __________ on the market

portfolio.

a.
a call option

b.
a future contract

c.
a put option

d.
none of the above

32. The Treynor-Black model is used __________.

a.
by almost all investment managers

b.
by the majority of investment managers

c.
by some sophisticated investment managers

d.
only by academicians like Black and Treynor

33. The Treynor-Black model is a model that shows how an investment manager can
use security analysis and statistics to construct __________.

a.
a market portfolio

b.
a passive portfolio

c.

an active portfolio

d.
an index portfolio

34. If an investor is a perfect market timer, his distribution of monthly portfolio

returns will __________.

a.
be skewed to the left

b.
be skewed to the right

c.
exhibit kurtosis

d.
exhibit neither skewness nor kurtosis

35. Robert Merton developed __________.

a.
the arbitrage pricing theory

b.
the capital asset pricing model

c.
the theory of active portfolio management

d.
none of the above

36. In the Treynor-Black model, the active portfolio will contain stocks with
__________.

a.
alphas equal to zero

b.
negative alphas

c.
positive alphas

d.
some negative and some positive alphas

37. If a portfolio manager consistently obtains a high Sharpe measure, the

manager's forecasting ability __________.

a.
is above average

b.
is average

c.
is below average

d.
cannot be determined based on the Sharpe measure

38. The theory of efficient frontiers has __________.

a.
no adherents among practitioners

b.
one adherent among practitioners

c.
a significant number of adherents among practitioners

d.
completely supported by practitioners

39. In the Treynor-Black model, security analysts __________.

a.
analyze a relatively small number of stocks

b.
analyze all stocks which are publicly traded

c.
are redundant

d.
devote their attention to market timing rather than fundamental analysis

40. Active portfolio management consists of __________.

a.
market timing

b.
security analysis

c.
both a and b

d.
neither a nor b

41. A market timing strategy is one where asset allocation in the stock market
__________ when one forecasts the stock market will outperform treasury bills.

a.
decreases

b.
increases

c.
remains the same

d.
is indeterminable

42. In the Treynor-Black model, analysts should calculate __________ for stocks.

a.
the alpha

b.
the beta

c.
the residual variance

d.

all of the above

43. If all ___ are ___ in the Treynor-Black model, there would be no reason to
depart from the passive portfolio.

a.
alphas, zero

b.
alphas, positive

c.
betas, positive

d.
standard deviations, positive

44. In the Treynor-Black model, the weight of each analyzed security in the portfolio
should be proportional to its __________.

a.
alpha/beta

b.
alpha/residual variance

c.

beta/residual variance

d.
none of the above

45. The critical variable in the determination of the success of the active portfolio is
__________.

a.
alpha/nonsystematic risk

b.
alpha/systematic risk

c.
delta/nonsystematic risk

d.
delta/systematic risk

46. Consider the theory of active portfolio management. Stocks A and B have the
same positive alpha and the same nonsystematic risk. Stock A has a higher beta
than stock B. You should want __________ in your active portfolio.

a.
equal proportions of stocks A and B

b.

more of stock A than stock B

c.
more of stock B than stock A

d.
more information is needed to answer this question

47. Consider the theory of active portfolio management. Stocks A and B have the
same beta and non-systematic risk. Stock A has higher positive alpha than stock
B. You should want __________ in your active portfolio.

a.
equal proportions of stocks A and B

b.
more of stock A than stock B

c.
more of stock B than stock A

d.
more information is needed to answer this question

48. The market timing form of active portfolio management relies on __________
forecasting and the security selection form of active portfolio management relies
on __________ forecasting.

a.
macroeconomic, macroeconomic

b.
macroeconomic, microeconomic

c.
microeconomic, macroeconomic

d.
microeconomic, microeconomic

49. Active portfolio managers try to construct a risky portfolio with _______.

a.
a higher Sharpe measure than a passive strategy

b.
a lower Sharpe measure than a passive strategy

c.
the same Sharpe measure as a passive strategy

d.
very few securities

50. Consider the theory of active portfolio management. Stocks A and B have the
same positive alpha and the same beta. Stock A has higher nonsystematic risk
than stock B. You should want __________ in your active portfolio.

a.
equal proportions of stocks A and B

b.
more of stock A than stock B

c.
more of stock B than stock A

d.
more information is needed to answer this question

51. __________ portfolio managers experience streaks of abnormal returns which

are hard to label as lucky outcomes, and __________ anomalies in realized
returns have been sufficiently persistent such that portfolio managers could use
them to beat a passive strategy over prolonged periods.

a.
No, no

b.
No, some

c.
Some, no

d.
Some, some

52. Stocks A and B have betas of 0.8 and residual variances of 0.016. Stock A has an
alpha of .010 while stock B has an alpha of .012. If stock A represents 1% of an
active portfolio, stock B should represent __________ of an active portfolio.

a.
.80%

b.
1.00%

c.
1.20%

d.
1.25%

53. The correct measure of timing ability is____________for a portfolio manager

who correctly forecasts 40% of bull markets and 65% of bear markets.

a.
-5%

b.
5%

c.
5%

d.
95%

54. Stocks A and B have alphas of .01 and residual variances of .015. Stock A has a
beta of 0.8 while stock B has a beta of 1.0. If stock A represents 2% of an active
portfolio, stock B should represent __________ of an active portfolio.

a.
1.6%

b.
2.0%

c.
2.2%

d.
2.5%

55. Stocks A and B have alphas of .01 and betas of .90. Stock A has a residual
variance of .020 while stock B has a residual variance of .016. If stock A
represents 2% of an active portfolio, stock B should represent __________ of an
active portfolio.

a.

1.6%

b.
2.0%

c.
2.2%

d.
2.5%

56. Portfolio managers Paul Martin and Kevin Krueger each manage $1,000,000
funds. Paul Martin has perfect foresight and the call option value of his perfect
foresight is $150,000. Kevin Krueger is an imperfect forecaster and correctly
predicts 50% of all bull markets and 70% of all bear markets. The correct
measure of timing ability for Kevin Krueger is __________.

a.
0.200

b.
0.450

c.
0.725

d.
1.450

57. Portfolio managers Paul Martin and Kevin Krueger each manage $1,000,000
funds. Paul Martin has perfect foresight and the call option value of his perfect
foresight is $150,000. Kevin Krueger is an imperfect forecaster and correctly
predicts 50% of all bull markets and 70% of all bear markets. The value of
Kevin Krueger's imperfect forecasting ability is __________.

a.
$30,000

b.
$67,500

c.
$108,750

d.
$217,500

58. Chuck Douglass, an imperfect forecaster correctly predicts 57% of all bull
markets and 68% of all bear markets. Roy Simmonds is a perfect forecaster. If
Chuck Douglass is able to charge a fee of $125,000, the fee that Roy Simmonds
should charge is __________. Assume that both forecasters manage similar size
funds.

a.
$31,250

b.
$200,000

c.
$500,000

d.
$625,000

59. A mutual fund invests in large-capitalization stocks. Its performance should be

measured against which one of the following?

a.
Russell 2000 index

b.
S&P 500 index

c.
Wilshire 5000 index

d.
Dow Jones Industrial Average

60. Assume you purchased a rental property for $100,000 and sold it one year later
for $115,000 (there was no mortgage on the property). At the time of the sale,
you paid $3,000 in commissions and $1000 in taxes. If you received $10,000 in
rental income (all received at the end of the year), what annual rate of return did
you earn?

a.

6%

b.
11%

c.
21%

d.
25%

61. The table presents the actual return of each sector of the manager's portfolio in
column (1), the fraction of the portfolio allocated to each sector in column (2),
the benchmark or neutral sector allocations in column (3), and the returns of
sector indexes in column 4.

Reference: Ref. 19-5

What was the manager's return in the month?

a.
2.07%

b.
2.21%

c.
2.24%

d.
4.80%

62. The table presents the actual return of each sector of the manager's portfolio in
column (1), the fraction of the portfolio allocated to each sector in column (2),
the benchmark or neutral sector allocations in column (3), and the returns of
sector indexes in column 4.

Reference: Ref. 19-5

What was the bogey's return in the month?

a.
2.07%

b.
2.21%

c.
2.24%

d.
4.80%

63. The table presents the actual return of each sector of the manager's portfolio in
column (1), the fraction of the portfolio allocated to each sector in column (2),
the benchmark or neutral sector allocations in column (3), and the returns of
sector indexes in column 4.

Reference: Ref. 19-5

What was the manager's over or under performance for the month?

a.
Under performance 0.03%

b.
Over performance 0.03%

c.
Over performance 0.14%

d.
Under performance 3%

64. The table presents the actual return of each sector of the manager's portfolio in
column (1), the fraction of the portfolio allocated to each sector in column (2),
the benchmark or neutral sector allocations in column (3), and the returns of
sector indexes in column 4.

Reference: Ref. 19-5

What is the contribution of security selection to relative performance?

a.

-0.15%

b.
0.15%

c.
-0.3%

d.
0.3%

65. The table presents the actual return of each sector of the manager's portfolio in
column (1), the fraction of the portfolio allocated to each sector in column (2),
the benchmark or neutral sector allocations in column (3), and the returns of
sector indexes in column 4.

Reference: Ref. 19-5

What is the contribution of asset allocation to relative performance?

a.
-0.18%

b.
0.18%

c.
-0.15%

d.
0.15%

66. Morningstar's RAR produces results which are similar but not identical to ___ .

a.
Jensen's alpha

b.
M2

c.
Treynor's ratio

d.
Sharpe's ratio

67. The Treynor-Black Model assumes security markets are ___ .

a.
Completely efficient

b.
Nearly efficient

c.
Very inefficient

d.
Random walks

68. The appraisal ratio is equal to the stocks ____ divided by its ____ .

a.
Diversifiable risk, beta

b.
Beta, alpha

c.
Alpha, beta

d.
Alpha, diversifiable risk

69. Empirical tests to date show ___ .

a.
Large rewards earned by market timing ability

b.

Little evidence of market timing ability

c.
Clear cut evidence of substantial market timing ability

d.
Evidence that absolutely no market timing ability exists