F420 Chapter 24: Portfolio Performance Evaluation

The contribution of an asset class is the contribution from asset allocation given by ______ plus the contribution from security selection given by ______. A. Excess weight in asset class × Excess return; Weight in asset class × Benchmark return B. Weight in asset class × Benchmark return; Excess weight in asset class × Excess return C. Excess weight in asset class × Benchmark return; Weight in asset class × Excess return D. Weight in asset class × Excess return; Excess weight in asset class × Benchmark return

C. Excess weight in asset class × Benchmark return; Weight in asset class × Excess return

When we compare a fund with its benchmark index, the interpretation becomes more intuitive if we use M2 rather than the Sharpe ratio because ______. A. it shows the difference in variance when portfolio return is the same as market return B. M2 uses systematic risk instead of total risk C. it shows the difference in return when portfolio variance is the same as market variance D. M2 uses excess return instead of average return

C. it shows the difference in return when portfolio variance is the same as market variance

Suppose you invested $2,000 in a mutual fund two years ago, added $1,000 a year later, and redeemed all your shares today. If the fund returns for the first and the second year were 10% and 8% respectively, the dollar-weighted average return on your investment is ______. A. greater than the time-weighted average return B. greater than 9% C. less than the time-weighted average return D. greater than the arithmetic average return

C. less than the time-weighted average return Reason: You have more money invested during the second year when the return is lower.

When we construct the bogey to attribute performance of a managed portfolio, the weights of assets in the bogey depend on ______. A. the risk premium on the market portfolio B. the risk-free rate C. the risk tolerance of the investor D. the implied volatility of S&P 500 index

C. the risk tolerance of the investor

The value of an imperfect timer is the value of the perfect-timing call option ______ the measure of timing ability. A. plus B. minus C. times D. divided by

C. times

An active strategy interferes with portfolio evaluation by making the portfolio apparently ______ volatile and ______ the estimate of the Sharpe ratio. A. more; raising B. less; raising C. less; lowering D. more; lowering

D. more; lowering

The active strategy with shifting means appears _____ than it really is and ____ the estimate of the Sharpe measure downward. A. smoother; pulls B. riskier; pushes C. smoother; biases D. riskier; biases

D. riskier; biases

The only manipulation-proof performance measure is ______. A. alpha based on the Fama-French model B. the Sharpe ratio C. the information ratio D. the Morningstar risk-adjusted return

D. the Morningstar risk-adjusted return

The ______ ______ is the constant annual return over the 20 years that would provide the same total cumulative return over the entire investment period.

Geometric Average

Which statements are true of style analysis and which are true of evaluation based on the SML of the CAPM.

Is a better representation of performance relative to the theoretically-prescribed passive portfolio ---> SML Uses multiple asset classes for comparison ---> Style Analysis Reveals the strategy that most closely tracks the fund's activity and measures performance relative to this strategy ---> Style Analysis Imposes extra constraints on the regression coefficients ---> Style Analysis

An equivalent representation of Sharpe's ratio, proposed by Graham and Harvey, and later popularized by Leah Modigliani is dubbed the ______ measure.

M2

______ ______ involves shifting funds between a market-index portfolio and a safe asset, depending on whether the index is expected to outperform the safe asset.

Market Timing

The _______ ______-______ _______ can be interpreted as the risk-free equivalent excess return of the portfolio for an investor with risk aversion measured by γ.

Morningstar risk-adjusted rating

The performance attribution procedure explains the difference in returns between a managed portfolio and a selected benchmark portfolio which is called the _______.

bogey

The collection of money managers of similar investment style used for assessing relative performance of a portfolio manager is the ______ _______.

comparison universe

Placing a value on perfect timing enables us to assign value to _______-_______-_______ timers.

less-than-perfect

The ______ skew of the timer's distribution is a manifestation of the fact that the extreme values are all positive.

positive

The systematic measurement of the exposures of managed portfolios by the regression of fund returns on indexes representing a range of asset classes is referred to as ______ ______.

style analysis

Since each return has an equal weight in the geometric average, it is also called the ______-______ average return.

time-weighted

For an investor with preferences defined by U = E(rP) − ½ A σ2PP2, the optimal entire risky portfolio maximizes which measure? A. Jensen's alpha B. Sharpe ratio C. Information ratio D. Treynor measure

Sharpe Ratio

The benchmark for acceptable performance is the ______ ______ of the market index because the investor can easily opt for a passive strategy by investing in an indexed equity mutual fund.

Sharpe Ratio

Match the portfolio performance measure with its description.

Sharpe Ratio ---> Average excess return divided by standard deviation of excess returns Treynor Measure ---> Average excess return divided by systemic risk (β) Jensen's Alpha ---> Average return above the CAPM prediction given the portfolio's beta Information Ratio ---> Alpha divided by the nonsystematic risk of the portfolio

True or false: Efficient allocation depends on the quality of financial professionals and the ability of financial markets to identify and direct capital to the best stewards.

TRUE

True or false: Even moderate levels of statistical noise make performance evaluation extremely difficult in practice.

TRUE

True or false: Style analysis has become a very popular in the investment management industry and has spawned quite a few variations on Sharpe's methodology.

TRUE

Select all that apply Which statements are true about the use of comparison universes to evaluate managers? A. It can be misleading because managers' levels of risk may vary. B. Dollar-weighted average returns are used to rank the funds. C. t can be misleading when managers focus on different assets within an asset class. D. A 90th percentile manager has performed better than 10% of competing funds over the evaluation period.

A. It can be misleading because managers' levels of risk may vary. C. t can be misleading when managers focus on different assets within an asset class.

Select all that apply Which statements are true about the use of comparison universes to evaluate managers? A. It can be misleading when managers focus on different assets within an asset class. B. A 90th percentile manager has performed better than 10% of competing funds over the evaluation period. C. Dollar-weighted average returns are used to rank the funds. D. It can be misleading because managers' levels of risk may vary.

A. It can be misleading when managers focus on different assets within an asset class. D. It can be misleading because managers' levels of risk may vary.

Select all that apply Which statements are correct about market timing? A. Market timers shift beta based on their expectation of the performance of the market index. B. Market timing ability can be tested by adding a squared term to the usual linear index model. C. Market timers shift beta and mean return, moving into and out of the market. D. Previous research shows significant evidence of market timing ability in mutual funds.

A. Market timers shift beta based on their expectation of the performance of the market index. B. Market timing ability can be tested by adding a squared term to the usual linear index model. C. Market timers shift beta and mean return, moving into and out of the market.

Select all that apply Evaluating the performance of a fund manager presents which difficulties? A. Risk levels may change along with portfolio composition. B. The proper measure of risk may not be obvious. C. The manager may use fundamental analysis. D. The manager may use technical analysis. E. Average portfolio return is not straightforward to measure.

A. Risk levels may change along with portfolio composition. B. The proper measure of risk may not be obvious. E. Average portfolio return is not straightforward to measure.

Select all that apply Which three of the following are components of performance commonly used in performance attribution? A. Security choice within each sector B. Broad asset market allocation choices across equity, fixed-income, and money markets C. Industry (sector) choice within each market D. The level of Jensen's alpha achieved

A. Security choice within each sector B. Broad asset market allocation choices across equity, fixed-income, and money markets C. Industry (sector) choice within each market

What is the appropriate performance metric when evaluating potential components of the full risky portfolio? A. Treynor measure B. Sharpe ratio C. Information ratio D. Jensen's alpha

A. Treynor measure

What is the appropriate performance metric when evaluating potential components of the full risky portfolio? A. Treynor measure B. Sharpe ratio C. Jensen's alpha D. Information ratio

A. Treynor measure

As mutual funds are barred from short positions, the regression coefficients of a style analysis are constrained to be ________. A. either zero or positive B. greater than 1 C. positive D. greater than or equal to 1

A. either zero or positive

When we evaluate the performance of a fund manager, the historical average return would be invalid as a performance measure because ______. A. it does not adjust for risk B. higher-risk investments outperform lower risk ones in bear markets C. volatility generates statistical errors in the estimate of expected return D. higher-risk investments underperform lower risk ones in bull markets

A. it does not adjust for risk

Suppose we are attributing performance of a managed portfolio to asset allocation, sector selection, and security selection. If the portfolio outperforms the bogey by sector selection, it ______. A. overweights well-performing sectors and underweights poorly performing sectors B. successfully times the market to generate an abnormal return C. overweights well-performing stocks and underweights poorly performing stocks

A. overweights well-performing sectors and underweights poorly performing sectors

The dollar-weighted average return on an investment is ______. A. the discount rate that makes the net present value of the investment equal to zero B. the rate of return that mutual funds include in their annual reports C. greater than the time-weighted average return D. less than or equal to the time-weighted average return

A. the discount rate that makes the net present value of the investment equal to zero

If you were a perfect market timer, ______. A. your return would be truly risk-free B. it would be possible for you to have a return lower than the risk-free rate C. you would prefer an investment with a low standard deviation D. you should avoid an investment with a large standard deviation

A. your return would be truly risk-free

Select all that apply Consider the following data. Portfolio P has average return of 28%, beta of 2, and standard deviation of 16%. The market has average return of 14%, beta of 1, and standard deviation of 4%. If the risk-free rate is 4%, for which measures was Portfolio P better? A. Sharpe ratio B. Treynor measure C. Jensen's alpha

B. Treynor measure Reason: Portfolio P is 12% and market is 10% C. Jensen's alpha Reason: Portfolio P is 4% and market is zero by definition.

Perfect market timing is equivalent to holding ______. A. a market index and the risk-free asset B. a free call option on the market index C. a well-diversified portfolio D. a portfolio that has a negative beta

B. a free call option on the market index

A portfolio that has a higher Treynor measure than the market will have a T-line with a larger ______ than the ______ Market Line A. intercept; Capital B. slope; Security C. slope; Capital D. intercept; Security

B. slope; Security

When we attribute the performance of a managed portfolio, the contribution of asset allocation to superior performance equals the sum over all markets of the excess weight in each market times ________. A. the excess return on the bogey B. the return of the market index C. the risk tolerance of the investor D. the risk-free rate

B. the return of the market index