Chapter 18 Test Bank - Static PDF

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Chapter 18 Test Bank - Static Student: _______________________________________________________________________________________

1.

A mutual fund with a beta of 1.1 has outperformed the S&P 500 over the last 20 years. We know that this mutual fund manager _____.

A. must have had superior stock selection ability B. must have had superior asset allocation ability C. must have had superior timing ability D. may or may not have outperformed the S&P 500 on a risk-adjusted basis 2.

The comparison universe is __________.

A. B. C. D.

the bogey portfolio a set of mutual funds with similar risk characteristics to your mutual fund the set of all mutual funds in the United States the set of all mutual funds in the world

3.

Which one of the following performance measures is the Sharpe ratio?

A. B. C. D.

4. A. B. C. D.

average excess return to beta ratio average excess return to standard deviation ratio alpha to standard deviation of residuals ratio average return minus required return

2

The M measure is a variant of ________________. the Sharpe measure the Treynor measure Jensen's alpha the appraisal ratio

5. A managed portfolio has a2 standard deviation equal to 22% and a beta of .9 when the market portfolio's standard deviation is 26%. The adjusted portfolio

P*

needed to calculate the M measure will have ________ invested in the managed portfolio and the rest in T-bills.

A. B. C. D.

84.6% 118% 18% 15.4%

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. B. C. D. 7.

A. B. C. D. 8.

A. B. C. D. 9.

A. B. C. D.

dollar-weighted return method; dollar-weighted return method dollar-weighted return method; time-weighted return method time-weighted return method; dollar-weighted return method time-weighted return method; time-weighted return method Consider the Sharpe and Treynor performance measures. When a pension fund is large and well diversified in total and it 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, which may not be fully diversified. Sharpe; Sharpe Sharpe; Treynor Treynor; Sharpe Treynor; Treynor Consider the theory of active portfolio management. Stocks A and B have the same beta and the same positive alpha. Stock A has higher nonsystematic risk than stock B. You should want __________ in your active portfolio. equal proportions of stocks A and B more of stock A than stock B more of stock B than stock A The answer cannot be determined from the information given. Suppose that over the same time period two portfolios have the same average return and the same standard deviation of return, but portfolio A has a higher beta than portfolio B. According to the Sharpe ratio, the performance of portfolio A __________. is better than the performance of portfolio B is the same as the performance of portfolio B is poorer than the performance of portfolio B cannot be measured since there is no data on the alpha of the portfolio

10. Which model is preferred by academics, and is gaining in popularity with practitioners, when evaluating investment performance? A. B. C. D.

the Treynor-Black model the single-index model the Fama-French three-factor model the Sharpe model

.

11 The risk-free rate, average returns, standard deviations, and betas for three funds and the S&P 500 are given below.

What is the Treynor measure for portfolio A?

A. B. C. D.

12.38% 2.38% .91% 3.64%

12. The risk-free rate, average returns, standard deviations, and betas for three funds and the S&P 500 are given below.

2

What is the M measure for portfolio B?

A. .43% B. 1.25% C. 1.77% D. 1.43%

. 13 The risk-free rate, average returns, standard deviations, and betas for three funds and the S&P 500 are given below.

If these portfolios are subcomponents that make up part of a well-diversified portfolio, then portfolio ______ is preferred.

A. B. C. D.

A B C S&P 500

14. The risk-free rate, average returns, standard deviations, and betas for three funds and the S&P 500 are given below.

2

Based on the M measure, portfolio C has a superior return of _____ as compared to the S&P 500.

A. B. C. D.

-1.33% 1.43% 2% 0%

15. Which one of the following is largely based on forecasts of macroeconomic factors? A. B. C. D.

security selection passive investing market efficiency market timing

16. Based on the example used in the book, a perfect market timer would have made _______ by 2008 on a $1 investment made in 1926. A. B. C. D.

$100 $1,626 $1.5 million $36.7 billion

17.

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

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

A. B. C. D.

fund A fund B fund C The answer cannot be determined from the information given.

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

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

__________.

A. B. C. D.

fund A fund B fund C The answer cannot be determined from the information given.

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

You want to evaluate the three mutual funds using the Jensen measure for performance evaluation. The fund with the highest Jensen measure of performance is

__________.

A. B. C. D.

fund A fund B fund C S&P 500

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%, based on the following:

The total excess return on the managed portfolio was __________.

A. B. C. D.

2% 3% 4% 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%, based on the following:

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

A. B. C. D.

1.5% 2% 2.5% 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%, based on the following:

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

A. B. C. D.

1.5% 2% 2.5% 3.5%

23.

In a particular year, Lost Hope Mutual Fund made the following investments in asset classes:

The return on a bogey portfolio was 12%, based on the following:

The total extra return on the managed portfolio was __________.

A. B. C. D.

1% 2% 3% 4%

24.

In a particular year, Lost Hope Mutual Fund made the following investments in asset classes:

The return on a bogey portfolio was 12%, based on the following:

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

A. B. C. D.

-1% 0% 1% 2%

25.

In a particular year, Lost Hope Mutual Fund made the following investments in asset classes:

The return on a bogey portfolio was 12%, based on the following:

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

A. B. C. D.

-1% 0% 1% 2%

26. Which one of the following averaging methods is the preferred method of constructing returns series for use in evaluating portfolio performance? A. geometric average B. arithmetic average C. dollar weighted D. internal 27. The __________ calculates the reward to risk trade-off by dividing the average portfolio excess return by the portfolio beta. A. B. C. D.

Sharpe ratio Treynor measure Jensen measure appraisal ratio

28. 28. In creating the P* portfolio, one mixes the original portfolio P and T-bills to match the _________ of the market. A. B. C. D.

alpha beta excess return standard deviation 2

29. The M measure of portfolio performance was developed by ______________. A. B. C. D.

Modigliani and Miller Modigliani and Modigliani Merton and Miller Fama and French

30. Probably the biggest problem with evaluating the portfolio performance of actively managed funds is the assumption that __________________________. A. B. C. D.

the markets are efficient portfolio risk is constant over time diversification pays off security selection is more valuable than asset allocation

31. Perfect-timing ability is equivalent to having __________ on the market portfolio. A. B. C. D.

a call option a futures contract a put option a forward contract

32.

One hundred fund managers enter a contest to see how many times in 13 years they can earn a higher return than their competitors. The probability distribution of the number of successful years out of 13 for the best-performing money managers is

Out of this sample, chance alone would indicate that there is a ______ probability that someone would beat the market at least 11 times out of 13 years.

A. B. C. D.

51.3% 65.9% 67.1% 10.83%

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

a market portfolio a passive portfolio an active portfolio an index portfolio

34. If an investor is a successful market timer, his distribution of monthly portfolio returns will __________. A. B. C. D.

be skewed to the left be skewed to the right exhibit kurtosis exhibit neither skewness nor kurtosis

35. Recent analysis indicates that the style of investing is a critical component of fund performance. In fact, on average about _____ of fund performance is attributable to the asset allocation decision. A. B. C. D.

68% 74% 88% 97%

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

alphas equal to zero negative alphas positive alphas some negative and some positive alphas

37. Portfolio performance is often decomposed into various subcomponents, such as the return due to: I. Broad asset allocation across security classes II. Sector weightings within equity markets III. Security selection with a given sector The one decision that contributes most to the fund performance is _____. A. B. C. D.

I II III All contribute equally to fund performance.

38. The theory of efficient frontiers has __________. A. B. C. D.

no adherents among practitioners a small number of adherents among practitioners a significant number of adherents among practitioners complete support by practitioners

39. In the Treynor-Black model, security analysts __________. A. B. C. D.

analyze a relatively small number of stocks analyze all stocks that are publicly traded are redundant devote their attention to market timing rather than fundamental analysis

40. In the Treynor-Black model, security analysts __________. A. B. C. D.

analyze the entire universe of stocks assume that markets are inefficient treat market index as a baseline portfolio from which an active portfolio is constructed focus on selecting the best-performing bogey

41. Active portfolio management consists of: I. Market timing II. Security selection III. Sector selection within given markets IV. Indexing A. B. C. D.

I and II only II and III only I, II, and III only I, II, III, and IV

42. A market-timing strategy is one in which asset allocation in the stock market __________ when one forecasts that the stock market will outperform Treasury bills. A. B. C. D.

decreases increases remains the same may increase or decrease

43. In the Treynor-Black model, the contribution of individual security to the active portfolio should be based primarily on the stock's _________. A. B. C. D.

alpha beta residual variance information ratio

44. If all ______ are ______ in the Treynor-Black model, there would be no reason to depart from the passive portfolio. A. B. C. D.

alphas; zero alphas; positive betas; positive standard deviations; positive

45. In the Treynor-Black model, the weight of each analyzed security in the portfolio should be proportional to its __________. A. B. C. D.

alpha/beta alpha/residual variance beta/residual variance none of these options

46. The critical variable in the determination of the success of the active portfolio is the stock's __________. A. B. C. D.

alpha/nonsystematic risk ratio alpha/systematic risk ratio delta/nonsystematic risk ratio delta/systematic risk ratio

47. 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. B. C. D.

equal proportions of stocks A and B more of stock A than stock B more of stock B than stock A The answer cannot be determined from the information given.

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

equal proportions of stocks A and B more of stock A than stock B more of stock B than stock A The answer cannot be determined from the information given.

49. The market-timing form of active portfolio management relies on __________ forecasting, and the security selection form of active portfolio management relies on __________ forecasting. A. B. C. D.

macroeconomic; macroeconomic macroeconomic; microeconomic microeconomic; macroeconomic microeconomic; microeconomic

50. Active portfolio managers try to construct a risky portfolio with _______. A. B. C. D.

a higher Sharpe ratio than a passive strategy a lower Sharpe ratio than a passive strategy the same Sharpe ratio as a passive strategy very few securities

51. In performance measurement, the bogey portfolio is designed to _________. A. B. C. D.

measure the returns to a completely passive strategy measure the returns to a similar active strategy measure the returns to a given investment style equal the return on the S&P 500

52. __________ portfolio managers experience streaks of abnormal returns that are hard to label as lucky outcomes, and _________ anomalies in realized returns have been sufficiently persistent that portfolio managers could use them to beat a passive strategy over prolonged periods. A. B. C. D.

No; no No; some Some; no Some; some

53. A passive benchmark portfolio is: I. A portfolio in which the asset allocation across broad asset classes is neutral and not determined by forecasts of performance of the different asset classes II. One in which an indexed portfolio is held within each asset class III. Often called the bogey A. B. C. D.

I only I and III only II and III only I, II, and III

54. The correct measure of timing ability is ____________ for a portfolio manager who correctly forecasts 55% of bull markets and 55% of bear markets. A. B. C. D.

-5% 5% 10% 95%

55. It is very hard to statistically verify abnormal fund performance because of all of the following except which one? A. B. C. D.

Inevitably, some fund managers experience streaks of good performance that may just be due to luck. The noise in realized rates of return is so large as to make it hard to identify abnormal performance in competitive markets. Portfolio composition is rarely stable long enough to identify abnormal performance. Even if successful, there is really not much value to be added by active strategies such as market timing.

56. The term Jensen Measure is synonymous with which performance calculation? A. Sigma B. Delta C. Beta D. Alpha

57. Portfolio managers Martin and Krueger each manage $1 million funds. Martin has perfect foresight, and the call option value of his perfect foresight is $150,000. 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 Krueger is

__________. A. B. C. D.

20% 60% 75% 120%

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

__________. A. B. C. D.

$30,000 $67,500 $108,750 $217,500

59. Douglass, an imperfect forecaster, correctly predicts 57% of all bull markets and 68% of all bear markets. Simmonds is a perfect forecaster. If 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. B. C. D.

$31,250 $200,000 $500,000 $625,000

60. A mutual fund invests in large-capitalization stocks. Its performance should be measured against which one of the following? A. B. C. D.

Russell 2000 Index S&P 500 Index Wilshire 5000 Index Dow Jones Industrial Average

61. Assume you purchased a rental property for $100,000 and sold it 1 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 $1,000 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. B. C. D.

6% 11% 21% 25%

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.

What was the manager's return in the month?

A. B. C. D.

2.07% 2.21% 2.24% 4.8%

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 se...