FIN325FINALCH#22

14. Performance attribution seeks to determine the detailed investment style adopted by a money manager. (T/F)

False.

15. The purpose of performance attribution is to assess the risk of a portfolio. (T/F)

False.

16. GIPS requires compliant history for at least 10 years, or since inception, if less than 10 years. (T/F)

False.

3. The time-weighted rate of return is affected by any cashflows to the portfolio. (T/F)

False.

4. Total risk of a portfolio is measured by the beta coefficient. (T/F)

False.

5. When evaluating the performance of a mutual fund holding several S&P 500 stocks, one should always use the S&P 500 as the benchmark. (T/F)

False.

9. The use of RVOL implies that total risk is the proper measure of risk in performance evaluation. (T/F)

False.

1. Standard deviation, beta and coefficient of determination are readily available for mutual funds from sources like Morningstar. (T/F)

True.

10. Jensen's measure of performance is based on the CAPM. (T/F)

True.

11. Investors who have all their assets in one portfolio of securities should rely on the Sharpe measure rather than the Treynor measure. (T/F)

True.

12. Jensen's alpha measures the contribution of the portfolio manager. (T/F)

True.

13. Modigliani-squared is a return adjusted for volatility that allows returns between portfolios to be compared. (T/F)

True.

17. GIPS® was created to obtain global acceptance of a standard for fair presentation. (T/F)

True.

18. The coefficient of determination is also known as R-squared, is used to denote the degree of diversification. (T/F)

True.

19. GIPS® requirements include: uniformity in certain performance calculations and disclosures; inclusion of all actual fee-paying discretionary portfolios in composites with similar objectives; compliant history for at least 5 years, or since inception if less than 5 years. (T/F)

True.

2. The dollar-weighted rate of return is equivalent to the internal rate of return. (T/F)

True.

20. Time-weighted as opposed to dollar-weighted return captures rate of return actually earned by the portfolio manager. (T/F)

True.

6. The higher the RVAR, the better the risk-adjusted portfolio performance. (T/F)

True.

7. Sharpe's measure is a ratio of excess return to total risk. (T/F)

True.

8. Treynor's measure is a ratio of excess return to systematic risk. (T/F)

True.

6. The Global Investment Performance Standards (GIPS®) were created by: a. CFA Institute, the successor to AIMR. b. Russell/Mellon Financial, now Bank of New York Mellon Financial c. Morningstar. d. MSCI.

a. CFA Institue, the successor to AIMR.

26. GIPS presentation standards require: a. a 5-year performance record, or since inception if the fund is less than 5-years old. b. inclusion of terminated portfolios. c. cash accounting. d. exclusion of cash and cash equivalents.

a. a 5-year performance record, or since inception if the fund is less than 5-years old.

11. The return on a portfolio during a particular period was 13 percent, the risk-free rate was 6 percent, the return on the market was 12 percent, and the portfolio beta was 1.2. The performance of the portfolio (according to Jensen's measure) was __________ the market. a. inferior to Solution: p = (Rp - RF) - [p(RM - RF)] b. superior to = (13 - 6) - [1.2(13 - 6)] c. the same as = -0.2 percent d. not compared to Negative alpha, if statistically significant, means inferior performance.

a. a. inferior to Solution: p = (Rp - RF) - [p(RM - RF)]

24. One problem with style analysis is style: a. consistency. b. comparability. c. correctness. d. character.

a. consistency.

21. Under Jensen's 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.

a. statistically significant positive alpha.

8. Which one of the following statements is true? Notation: RVAR: Sharpe's reward-to-variability measure RVOL: Treynor's reward-to-volatility measure 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.

b. RVAR is based on total risk while RVOL is based on systematic risk.

19. Select the CORRECT statement about 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.

b. RVAR measures the slope of the line from RF to the portfolio being evaluated.

3. Which of the following indices would be most appropriate as a benchmark portfolio for a large-cap mutual fund? a. Wilshire 5000. b. S&P 500. c. Dow Jones Industrial Average. d. Russell 2000.

b. S&P 500.

9. Which is the better measure to estimate the performance of a well-diversified portfolio in relation to the market index? a. Sharpe's RVAR b. Treynor's RVOL c. Total return (alone) d. Portfolio beta (alone)

b. Treynor's RVOL.

4. The __________ indicates the percentage of the variance in the portfolio's returns explained by the market's returns. a. standard deviation b. coefficient of determination c. beta d. alpha

b. coefficient of determination.

7. The reward-to-variability ratio measures: a. return above the risk-free rate. b. excess return per unit of total risk. c. total risk per unit of excess return. d. return above the risk-free rate relative to the risk-free rate.

b. excess return per unit of total risk.

20. The reward-to-volatility ratio measures the excess return per unit of: a. total risk. b. systematic risk. c. market risk. d. unsystematic risk.

b. systematic risk.

1. The major question when evaluating the performance of a portfolio is: a. "Does the portfolio match the investor characteristics of the individual investor?" b. "Does the expected return of the portfolio meet the needs of the individual investor?" c. "Is the return on the portfolio adequate to compensate for the risk taken?" d. "Is the risk on the portfolio in line with the personal characteristics of the investor?"

c. "is the return on the portfolio adequate to compensate for the risk taken?"

10. According to Jensen's differential return measure, what is alpha? a. The intercept of the SML line b. The intercept of the CML line c. A means of identifying superior or inferior portfolio performance d. The actual excess return on a portfolio during one period

c. a means of identifying superior or inferior portfolio performance.

2. The --------------------- is the legitimate alternative to a portfolio that accurately reflects the objectives of the portfolio owners. a. market average index b. efficient portfolio c. benchmark portfolio d. performance standard

c. benchmark portfolio.

23. One approach to style analysis which uses the stocks in a portfolio to describe the fund's allocation among asset classes is known as: a. returns-based style analysis. b. asset allocation style analysis. c. holdings-based style analysis. d. mix-based style analysis.

c. holdings- based style analysis.

22. Which of the following is true regarding Modigliani-squared? a. It compares Treasury bills to the S&P 500 Index. b. It states its results in both percentage and graphical form. c. It equates the volatility of a portfolio with the market. d. It compares fixed income securities with equities securities.

c. it equates the volatility of a portfolio with the market.

18. Superior portfolio performance can result from: a. the ability to select undervalued securities. b. the ability to time market turns. c. superior selectivity or timing performance. d. neither superior selection nor timing. The market is too efficient.

c. superior selectivity or timing performance.

25. The --------------------- has issued minimum standards for investment performance. a. FINRA, formerly known as the National Association of Security Dealers b. Securities Exchange Commission (SEC) c. Association for Security Analysts and Portfolio Managers d. Chartered Financial Analyst Institute, formerly known as the Association for Investment Management and Research

d. Chartered financial analyst institute, formerly known as the association for investment management and research.

12. Which of the following measures uses the standard deviation, and evaluates portfolio performance on the basis of both return and diversification. a. Jensen's Alpha. b. Treynor's Reward to Volatility. c. M2. d. Sharpe Ratio.

d. Sharpe ratio.

5. If we are to assess performance carefully, we must do so on what kind of basis? a. quarterly b. annual c. attribution-weighted d. risk-adjusted

d. risk- adjusted.