Tutorial work - week 6 PDF

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Multiple Choice Questions 1. 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 Most mutual funds do not consistently, over time, outperform the S&P 500 index on the basis of either raw or risk-adjusted return measures. 2. Suppose two portfolios have the same average return, 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 is no data on the alpha of the portfolio E. None of these is correct. The Sharpe index is a measure of average portfolio returns (in excess of the risk free return) per unit of total risk (as measured by standard deviation). 3. Suppose you purchase 100 shares of GM 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 GM 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 GM 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 In the dollar-weighted return, the stock's performance in the second year, when 200 shares are held, has a greater influence on the overall dollar-weighted return. The time-weighted return ignores the number of shares held.

4. 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% E. None of these is correct 1% = 14% - [4% + 1.2(x - 4%)]; x = 11.5%. 5. 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 year 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. cannot tell from the information given The geometric mean will always be less than the arithmetic mean unless the returns in all periods are equal. 6. 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% [(1.25)(1.20)(1.25)(0.6667)]1/4 - 1.0 = 5.7% 7. 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.

The fund with the highest information ratio measure is __________. A. Fund A B. Fund B C. Fund C D. Funds A and B are tied for highest E. Funds A and C are tied for highest

Information ratio = P/(eP); A: P = 20 - 6 - .8(19 - 6) = 3.6; 3.6/4 = 0.9; B: P = 21 - 6 1(19 - 6) = 2.0; 2/1.25 = 1.6; C: P = 23 - 6 - 1.2(19 - 6) = 1.4; 1.4/1.20 = 1.16. 8. 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 is the data for the S&P 500 index.

The fund with the highest Sharpe measure is __________. A. Fund A B. Fund B C. Fund C D. Funds A and B are tied for highest E. Funds A and C are tied for highest A: (24% - 6%)/30% = 0.60; B: (12% - 6%)/10% = 0.60; C: (22% - 6%)/20% = 0.80; S&P 500: (18% - 6%)/16% = 0.75. 9. 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.

The fund with the highest Treynor measure is __________. A. Fund A B. Fund B C. Fund C D. Funds A and B are tied for highest E. Funds A and C are tied for highest A: (13% - 6%)/0.5 = 14; B: (19% - 6%)/1.0 = 13; C: (25% - 6%)/1.5 = 12.7; S&P 500: (18% - 6%)/1.0 = 12.

10. 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.

The fund with the highest Jensen measure is __________. A. Fund A B. Fund B C. Fund C D. Funds A and B are tied for highest E. Funds A and C are tied for highest A: 17.6% -[6% + 1.2(18% - 6%)] = - 2.8%; B: 17.5% - [6% + 1.0(18% - 6%)] = - 0.5; C: 17.4% - [6% + 0.8(18% - 6%)] = + 1.8. 11. Suppose you purchase one share of the stock of Volatile Engineering 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. 8.53% D. 11.46% E. 12.35% Year 1: ($30 + $2 - $36)/$36 = - 11.11%; Year 2: ($36.45 + $2 - $30)/$30 = 28.17%; Average: 8.53%. 12. Suppose you purchase one share of the stock of Volatile Engineering 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% $36 + $30/(1 + r) = $2/(1 + r) + $4/(1 + r)2 + $72.90/(1 + r)2; r = 12.35%.

13. 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 E. None of these is correct A: (2% + 18%)/2 = 10%; B: (9% + 11%)/2 = 10%. The following data are available relating to the performance of Seminole Fund and the market portfolio:

The risk-free return during the sample period was 6%. 14. 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% 22/30 = .7333 or 73.33% invested in Seminole Fund and 1- 73.33% = 26.67% in T-Bills 15. Calculate the M2 measure for the Seminole Fund. A. 4.0% B. 20.0% C. 2.86% D. 0.8% E. 40.0% 22/30 = .7333; 1 - .7333 = .2667; M2 = [.7333 (18) + .2667 (6)] - 14 = 0.8%. 16. 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 these is correct.

Risk-adjusted mutual fund performance measures have decreased in popularity because 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. 17. 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 these is correct. The dollar-weighted return on a portfolio is equivalent to finding the internal rate of return on the cash flows to the portfolio. 18. 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. The geometric average is the rate that would give the same result if applied over an n-year period as the individual years' returns. The present value can be compounded by r1, r2,  ,r n or compounded by rG for n periods to yield the same future value. 19. 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. The model was developed by Leah Modigliani of Morgan Stanley Dean Witter and Franco Modigliani, her grandfather who is a Nobel laureate. 20. 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. Both measures are percentages and are similar. Both can be used to rank portfolios in terms of performance relative to risk. But the measures might give different rankings....