SET 7 PRACTICE QUESTIONS

Chapters 21 and 22

Portfolio Management, Performance Evaluation

CHAPTER 21
1.

In the portfolio management process, which of the following is step #1?

a.
monitoring of market conditions
b.
formulation of appropriate investment strategies
c.
identify and evaluate an investors objectives, constraints, and preferences
d.
adjust the portfolio as appropriate

2.

Which of the following is not a characteristic associated with institutional investors?

a.
institutions can be defined financially by their assets and goals
b.
some institutions are free of tax considerations under normal circumstances
c.
institutions use quantitative concepts to define risk
d.
institutions are subject to numerous legal and regulatory constraints

3.

Which of the following describes the process of forming expectations according to the
portfolio management process?
a.
form micro or individual asset expectations
b.
form micro expectations, and then macro or capital market expectations
c.
form macro expectations first, and then micro expectations
d.
none of the above describes the process as outlined

4.

The life cycle approach for individual investors has four phaseswhich of the
following is not one of these phases?
a.
The consolidation phase
b.
the accumulation phase
c.
The spending phase
d.
The capital preservation phase.

5.

The investment policy statement includes

a.
Objectives only.
b.
Objectives and constraints.
c.
Return objectives, risk posture, and constraints.
d.
Objectives, constraints and preferences.

6.

Which of the following, in the investment policy statement, is not a constraint or

preference?
a.
liquidity
b.
risk
c.
time horizon
d.
unique circumstances

7.

The investment policy statement includes

a.
Objectives, constraints and preferences, and the asset allocation plan
b.
Objectives and constraints.
c.
Return expectations, risk posture, constraints, and preferences.
d.
Strategies and asset allocation plans

8.

With regard to the investment policy statement, there are:

a.
two objectives, and four constraints/preferences
b.
one objective, and five constraints/preferences
c.
two objectives, and five more elements
d.
one objective, return, and six more elements

9.

When estimating expected returns for the next few years,

a.
dividend yield is likely to average what it has in the past
b.
dividend yield is now significantly lower, and is likely to remain so
c.
based on GDP growth rates, the price appreciation component is likely to increase
enough to make up for a lower dividend yield
d.
the dividend yield component has averaged between 4 and 5% for many years,
and is likely to continue to do so

10.

With regard to asset allocation, choose the INCORRECT statement:

a.
the asset allocation decision involves deciding the percentage of investable funds
to be placed in stocks, bonds, and cash equivalents
b.
differences in asset allocation will be the key factor over time causing differences
in portfolio performance
c.
it is the second most important decision made by investors in the portfolio
management process, security selection being the most important
d.
how asset allocation decisions are made by investors remains a subject that is not
fully understood.

11.

At least for large institutional portfolios, asset allocation is thought to account for about
what percentage of the portfolios results?
a.
40%.
b.
90% or more
c.
80%
d.
60%

12.

A market timing approach to portfolio management that increases the proportion of

funds in stocks when the stock market is expected to be rising, and increases cash when
the stock market is expected to be falling, is an example of
a.
strategic asset allocation.
b.
portfolio optimization.
c.
liquidity expectation timing.
d.
tactical asset allocation

CHAPTER 22
13.

You are asked to calculate a rate of return over a certain time horizon in order to
evaluate the portfolio manager. You should use a
a.
dollar-weighted return.
b.
time-weighted return.
c.
client-weighted return.
d.
internal rate of return.

14.

AIMRs presentation standards are

a.
a set of guiding ethical principles.
b.
the maximum standards for presenting performance.
c.
a set of recommendations only.
d.
a guarantee of complete comparability among investment managers.

15.

With regard to the reward-to-variability ratio (RVAR):

a.
RVAR is an absolute measure of performance.
b.
RVAR measures the slope of the line from RF to the portfolio being evaluated.
c.
The closer the RVAR to 0.0, the better is the performance.
d.
RVAR does not take into account how well diversified a portfolio was.

16.

Which one of the following statements is CORRECT concerning RVAR and RVOL?
a.
RVOL is based on total risk while RVAR is based on systematic risk
b.
RVAR is based on total risk while RVOL is based on systematic risk
c.
RVAR is based on unsystematic risk while RVOL is based on systematic risk
d.
RVOL is based on systematic risk while RVAR is based on unsystematic risk

17.

Which is the better measure to estimate the performance of a portfolio: The Sharpe
Index or the Treynor Index?
a.
The Sharpe Index
b.
The Treynor Index.
c.
Both are equally good.
d.
Not enough information is provided to answer this question.

18.

Using RVAR and RVOL, poorly diversified portfolios would be ranked

a.
higher on the basis of the RVAR measure than by the RVOL measure.
b.
higher on the basis of the RVOL measure than by the RVAR measure.
c.
similarly by both the RVAR and RVOL measures.
d.
higher by the RVAR measure than by the differential return (Jensen) measure.

19.

With regard to the Sharpe and Treynor measures of performance, which is

CORRECT?
a.
RVAR does not take into account how well diversified a portfolio was during the
measurement period.
b.
RVAR implies that total risk is the proper measure to use.
c.
If an investor thinks it is correct to use systematic risk, RVAR is appropriate.
d.
Both measures will always provide the same rankings of portfolios.

20.

Under Jensens differential return approach to portfolio evaluation, superior market

timing is exhibited by a
a.
statistically significant positive alpha.
b.
statistically significant negative alpha.
c.
zero alpha.
d.
low positive alpha.

21.

According to Jensens differential return measure, what is alpha?

a.
The intercept of the SML line.
b.
The intercept of CML line.
c.
A means of identifying superior or inferior portfolio performance.
d.
The actual excess return on a portfolio during some period.

22.

As calculated, the alpha for a particular fund for a particular period

a.
can be either negative or positive but not zero.
b.
can be either positive or zero but not negative, with or without significance.
c.
Could be zero, negative, or positive, and may or may not be statistically
significant
d.
Could be zero, negative or positive and has to be statistically significant

23.

Determine the performance of a portfolio, according to Jensen's measure, when the

portfolio had an actual return of 13%, and the risk-free rate = 6%, the market return =
12%, and the portfolio had a beta of 1.2
a.
inferior
b.
superior
c.
same as that of the market
d.
not enough information is provided to answer this question

24.

The Sharpe, Treynor, and Jensen measures will agree on portfolio rankings if
a.
the portfolios are completely diversified.
b.
Only ex post data are used.
c.
Quarterly data are used in all three.
d.
Each portfolio consists of only one security.

25.

Regarding the composite measures of portfolio evaluation:

a.
Jensens differential return measure is based on the CAPM.
b.
Jensens alpha evaluates the ability of the portfolio manager to diversify.
c.
In the case of non-diversified portfolios, all three measures will provide similar
results.
d.
All three measures test for the significance of excess returns.

26.

The degree of diversification of a portfolio is measured by

a.
calculating the correlation coefficient between a stocks returns with those of the
market.
b.
calculating the association between a portfolio's return and the market's return
based on the square of the correlation coefficient.
c.
computing the correlation coefficient between a portfolio's return and that of the
market.
d.
dividing the average return of a portfolio by its beta.

27.

This statistical measure indicates the percentage of the variance in the portfolios
returns that is explained by the markets returns.
a.
The standard deviation.
b.
The coefficient of determination.
c.
The beta.
d.
The alpha.

28.

Portfolio performance is measured relative to a market portfolio. If the measurement of

the market portfolio is in error, then the SML and the portfolio measurements will be in
error also. This problem is referred to as ______ error.
a.
standard
b.
benchmark
c.
Roll
d.
Anticipated

29.

Performance attribution
a.
seeks to determine before the fact why success or failure occurred.
b.
is typically a bottom-up approach.
c.
does not require the identification of a benchmark of performance.
d.
often begins with the policy statement that guides the management of a portfolio.

30.

Which of the following portfolios would rank best in terms of portfolio performance?
Portfolio 1 7%
Portfolio 2 18%
Portfolio 3 25%
Risk-free rate 9%
a.
3, 2, 1
b.
3, 2, risk-free rate, 1
c.
3, 2, portfolio 1 was not acceptable because return was below the risk-free rate
d.
not enough information is provided to answer this question

Given the following information, answer the next 5 questions.

Fund 1
Fund 2
Fund 3
Fund 4

SD

Beta

1.97
2.94
1.82
4.70

1.0
.8
1.2
1.1

1.3
.6*
-3.5
4.2

R2
.85
.80
.90
.65

*significant at 5% level
31.

Which of these four funds returns are best explained by the markets returns?
a.
Fund 1
b.
Fund 2
c.
Fund 3
d.
Fund 4

32.

Which of these four funds had the largest market risk?

a.
Fund 1
b.
Fund 2
c.
Fund 3
d.
Fund 4

33.

Which of these four funds had the largest total risk?

a.
Fund 4
b.
Fund 3
c.
Fund 1
d.
More information is needed to answer this question.

34.

Which of these funds had the highest performance as determined by Jensens

performance measure?
a.
Fund 1
b.
Fund 2
c.
Fund 3
d.
Fund 4

35.

Which of these funds was least well diversified?

a.
Fund 1
b.
Fund 2
c.
Fund 3
d.
Fund 4