Investments Chapter 13

A portfolio has a beta of 1.52 and an actual return of 13.7 percent. The risk-free rate is 2.7 percent and the market risk premium is 7.8 percent. What is the value of Jensen's alpha? A. -0.86 percent B. 1.01 percent C. 1.14 percent D. 1.23 percent E. 1.37 percent

A. -0.86 percent

A diversified portfolio has a beta of 1.47 and a raw return of 14.28 percent. The market return is 11.74 percent and the market risk premium is 7.85 percent. What is Jensen's alpha of the portfolio? A. -1.15 percent B. -0.86 percent C. -0.29 percent D. 0.48 percent E. 0.62 percent

A. -1.15 percent

Trailer Co. stock has an expected return of 12.2 percent and a standard deviation of 11.8 percent. What is the smallest expected loss over the next month given a probability of 5 percent? A. -4.59 percent B. -6.09 percent C. -7.27 percent D. -11.49 percent E. -13.77 percent

A. -4.59 percent

A portfolio has a variance of .027556, a beta of 1.54, and an expected return of 11.2 percent. What is the Treynor ratio if the expected risk-free rate is 2.7 percent? A. .055 B. .063 C. .367 D. .498 E. .512

A. .055

The U.S. Treasury bill is yielding 1.85 percent and the market has an expected return of 7.48 percent. What is the Treynor ratio of a correctly-valued portfolio that has a beta of 1.33 and a variance of .0045? A. .056 B. .064 C. .069 D. .082 E. .087

A. .056

A portfolio has an expected return of 13.8 percent, a beta of 1.14, and a standard deviation of 12.7 percent. The U.S. Treasury bill rate is 3.2 percent. What is the Treynor ratio? A. .093 B. .138 C. .146 D. .835 E. .951

A. .093

A portfolio has a Sharpe ratio of .80, a standard deviation of 17.4 percent, and an expected return of 15.9 percent. What is the risk-free rate? A. 1.98 percent B. 2.36 percent C. 2.48 percent D. 3.09 percent E. 3.15 percent

A. 1.98 percent

Mike's portfolio has a two-year expected return of 21.70 percent. What is the expected return for one year? A. 10.85 percent B. 12.50 percent C. 13.33 percent D. 14.22 percent E. 15.34 percent

A. 10.85 percent

Which of the following should generally only be used to evaluate relatively diversified portfolios rather than individual securities? I. Sharpe ratio II. Treynor ratio III. Jensen's alpha A. I only B. II only C. III only D. I and II only E. I, II, and III

A. I only

Which one of the following statements is correct in relation to a security that has a negative Jensen's alpha? A. The security is overpriced and will plot below the security market line. B. The security is overpriced and will plot above the security market line. C. The security is underpriced and will plot below the security market line. D. The security is underpriced and will plot above the security market line. E. The security is incorrectly priced but you cannot tell if it is underpriced or overpriced based on the information provided.

A. The security is overpriced and will plot below the security market line.

The unadjusted total percentage return on a security that has not been compared to any benchmark is referred to as which one of the following? A. raw return B. indexed return C. real return D. marginal return E. absolute return

A. raw return

The Value-at-Risk measure assumes which one of the following? A. returns are normally distributed B. portfolios lie on the efficient frontier C. all portfolios are fully diversified D. returns tend to follow repetitive patterns E. the risk premium is constant over time

A. returns are normally distributed

The Sharpe ratio measures a security's return relative to which one of the following? A. total risk B. diversifiable risk C. market rate of return D. risk-free rate E. systematic risk

A. total risk

A stock has an annual standard deviation of 14.1 percent and an expected annual return of 11.5 percent. What is the smallest expected loss for the next 6 months given a probability of 2.5 percent? A. -8.90 percent B. -13.79 percent C. -14.57 percent D. -15.38 percent E. -16.67 percent

B. -13.79 percent

Your portfolio has a beta of 1.17, a standard deviation of 14.3 percent, and an expected return of 12.5 percent. The market return is 11.3 percent and the risk-free rate is 3.1 percent. What is the Treynor ratio? A. .015 B. .080 C. .109 D. .482 E. .510

B. .080

The U.S. Treasury bill is yielding 3.0 percent and the market has an expected return of 11.6 percent. What is the Treynor ratio of a correctly-valued portfolio that has a beta of 1.02, and a standard deviation of 12.2 percent? A. .074 B. .086 C. .102 D. .619 E. .628

B. .086

A portfolio has an average return of 9.7 percent, a standard deviation of 8.6 percent, and a beta of .72. The risk-free rate is 2.1 percent. What is the Treynor ratio? A. .098 B. .106 C. .121 D. .636 E. .884

B. .106

The U.S. Treasury bill is yielding 2.25 percent and the market has an expected return of 9.8 percent. What is the Sharpe ratio of a portfolio that has a beta of 1.32 and a variance of .027556? A. .55 B. .60 C. .69 D. .74 E. .82

B. .60

A portfolio has a beta of 1.16, a standard deviation of 12.2 percent, and an expected return of 11.55 percent. The market return is 10.4 percent and the risk-free rate is 3.2 percent. What is the portfolio's Sharpe ratio? A. .57 B. .68 C. .73 D. .77 E. .85

B. .68

The Miller Fund's correlation with the market is .648. What percentage of the fund's movement can be explained by movements in the overall market? A. 35 percent B. 42 percent C. 51 percent D. 65 percent E. 71 percent

B. 42 percent

Which measure would you use to know whether alpha is truly significant or just the result of random chance? A. Jensen's alpha B. Information ratio C. Jensen-Treynor alpha D. Sharpe ratio E. Treynor ratio

B. Information ratio

Which one of the following measures returns in relation to total risk? A. Treynor ratio B. Sharpe ratio C. Jensen's alpha D. Value at Risk E. beta

B. Sharpe ratio

You have computed the expected return using VaR with a 2.5 percent probability for a one-year period of time. How would this expected return be expressed on a normal distribution curve? A. lower tail starting at the point that is 2.5 standard deviations below the mean B. lower tail of a 95 percent probability range C. the point that corresponds to 2.5 standard deviations below the mean D. the point that represents the lower end of the 90 percent probability range E. the negative range that lies within 2.5 standard deviations of the mean

B. lower tail of a 95 percent probability range

Which one of the following is a statistical model, defined by its mean and standard deviation, that is used to assess probabilities? A. variance B. normal distribution C. efficient frontier D. Value at Risk E. Jensen's alpha

B. normal distribution

The Sharpe-optimal portfolio will be the investment opportunity set which lies on a straight line that has which of the following characteristics? A. the flattest slope when the line intersects the vertical axis at the risk-free rate B. the steepest slope when the line intersects the vertical axis at the risk-free rate C. the steepest slope when the line intersects the vertical axis at the origin D. the flattest slope when the line intersects the vertical axis at the market rate E. the steepest slope when the line intersects the vertical axis at the market rate

B. the steepest slope when the line intersects the vertical axis at the risk-free rate

High Mountain Homes has an expected annual return of 16.1 percent and a standard deviation of 20.3 percent. What is the smallest expected loss over the next month given a probability of 2.5 percent? A. -6.64 percent B. -8.67 percent C. -10.14 percent D. -12.12 percent E. -15.13 percent

C. -10.14 percent

What is the Treynor ratio of a portfolio comprised of 45 percent portfolio A and 55 percent portfolio B? The risk-free rate is 3.12 percent and the market risk premium is 8.5 percent. A. .041 B. .058 C. .069 D. .114 E. .136

C. .069

A portfolio has an average return of 12.4 percent, a standard deviation of 15.8 percent, and a beta of 1.35. The risk-free rate is 2.6 percent. What is the Sharpe ratio? A. .49 B. .52 C. .62 D. .71 E. .75

C. .62

Your portfolio has an expected return of 14.2 percent, a beta of 1.31, and a standard deviation of 15.3 percent. The U.S. Treasury bill rate is 3.48 percent. What is the Sharpe ratio of your portfolio? A. .65 B. .67 C. .70 D. .77 E. .83

C. .70

A portfolio has a beta of 1.26, a standard deviation of 15.9 percent, and an average return of 15.07 percent. The market rate is 12.7 percent and the risk-free rate is 3.6 percent. What is the Sharpe ratio? A. .61 B. .68 C. .72 D. .84 E. .88

C. .72

A portfolio has a variance of .0165, a beta of 1.05, and an expected return of 12.65 percent. What is the Sharpe ratio if the expected risk-free rate is 3.4 percent? A. .66 B. .70 C. .72 D. .82 E. .86

C. .72

A fund has an alpha of 0.73 percent and a tracking error of 4.9 percent. What is the fund's information ratio? A. 0.112 B. 0.135 C. 0.149 D. 0.208 E. 0.229

C. 0.149

A portfolio has a 3-year standard deviation of 18.1 percent. What is the one-year standard deviation? A. 6.39 percent B. 8.69 percent C. 10.45 percent D. 11.80 percent E. 12.33 percent

C. 10.45 percent

A portfolio has a standard deviation of 14.1 percent, a beta of 1.30 and a Treynor ratio of .094. The risk-free rate is 3.2 percent. What is the portfolio's expected rate of return? A. 14.83 percent B. 15.25 percent C. 15.42 percent D. 16.41 percent E. 16.56 percent

C. 15.42 percent

Your portfolio has a standard deviation of 11.7 percent. What is the two-year standard deviation? A. 14.87 percent B. 15.80 percent C. 16.55 percent D. 23.40 percent E. 24.15 percent

C. 16.55 percent

The one-year standard deviation of your portfolio is 14.8 percent. What is the two-year standard deviation? A. 16.47 percent B. 18.23 percent C. 20.93 percent D. 25.41 percent E. 27.20 percent

C. 20.93 percent

Angie owns a portfolio which has an expected annual return of 11.70 percent. What is the two-year expected return on her portfolio? A. 13.80 percent B. 19.52 percent C. 23.40 percent D. 27.60 percent E. 29.10 percent

C. 23.40 percent

Which one of the following concerns a money manager's control over investment risks, particularly potential short-run losses? A. Alpha management B. Normal distribution management C. Investment risk management D. Raw return distributions E. Volatility performance measures

C. Investment risk management

Which one of the following measures a portfolio's raw return against the expected return based on the Capital Asset Pricing Model? A. Sharpe ratio B. Treynor ratio C. Jensen's alpha D. beta E. Value at Risk

C. Jensen's alpha

The Jensen-Treynor alpha is equal to: A. the Treynor ratio divided by Jensen's alpha. B. the Treynor ratio multiplied by Jensen's alpha. C. Jensen's alpha divided by beta. D. Jensen's alpha divided by the standard deviation. E. Jensen's alpha divided by the Treynor ratio.

C. Jensen's alpha divided by beta.

Which one of the following measures a security's return in relation to the total risk associated with that security? A. beta B. Jensen's alpha C. Sharpe ratio D. Treynor ratio E. Value at Risk

C. Sharpe ratio

Which one of the following is the best interpretation of this VaR statistic: Prob (Rp ≤ -.15) = 37%? A. If your portfolio declines by 15 percent or more, that decline is expected to be followed by a 37 percent increase in value. B. Your portfolio is expected to lose at least 15 percent, but not more than 37 percent in any given year. C. There is a 37 percent chance that your portfolio will decline in value by at least 15 percent over the next year. D. Sometime in the future, your portfolio is expected to lose 15 percent or more in a single year, but have an overall average rate of return of 37 percent. E. There is a 37 percent chance that your portfolio will lose at least 15 percent of its value over the next 10 years.

C. There is a 37 percent chance that your portfolio will decline in value by at least 15 percent over the next year.

Which metric measures how volatile a fund's returns are relative to its benchmark? A. Jensen's alpha B. Information ratio C. Tracking error D. Sharpe ratio E. Treynor ratio

C. Tracking error

Which one of the following is the best indication that a security is correctly priced according to the Capital Asset Pricing Model? A. beta of zero B. beta of 1.0 C. alpha of zero D. alpha of 1.0 E. alpha of -1.0

C. alpha of zero

Which one of the following is the primary purpose of the Value-at-Risk computation? A. determine the 99 percent probability range given an abnormal distribution B. evaluate the risk-return tradeoff for a given mix of securities C. evaluate the probability of a significant loss D. determine the portfolio that maximizes the risk premium per unit of total risk E. determine the portfolio that maximizes the excess return per unit of systematic risk

C. evaluate the probability of a significant loss

Tony brags that his portfolio's rate of return is "beating the market". Which one of the following would best substantiate his claim? A. positive Sharpe ratio B. negative Treynor ratio C. positive Jensen's alpha D. zero Value at Risk E. beta greater than 1.0

C. positive Jensen's alpha

Your portfolio actually earned 6.2 percent for the year. You were expecting to earn 8.6 percent based on the CAPM formula. What is Jensen's alpha if the portfolio standard deviation is 12.1 percent and the beta is .93? A. -3.91 percent B. -3.40 percent C. -2.96 percent D. -2.40 percent E. -1.87 percent

D. -2.40 percent

A portfolio has a beta of 1.23 and a standard deviation of 11.6 percent. What is the Sharpe ratio if the market return is 12.4 percent and the market risk premium is 7.9 percent? A. .07 B. .11 C. .65 D. .84 E. .90

D. .84

A stock has a return of 16.18 percent and a beta of 1.47. The market return is 10.65 percent and the risk-free rate is 3.20 percent. What is the Jensen-Treynor alpha of this stock? A. -1.12 percent B. -0.17 percent C. 0.66 percent D. 1.38 percent E. 1.59 percent

D. 1.38 percent

The U.S. Treasury bill has a return of 2.84 percent while the S&P 500 is returning 10.84 percent. Your portfolio has an actual return of 14.76 percent and a beta of 1.31. What is the portfolio's Jensen's alpha? A. -0.47 percent B. -0.92 percent C. 1.37 percent D. 1.44 percent E. 1.57 percent

D. 1.44 percent

A portfolio has an actual return of 15.17 percent, a beta of .85, and a standard deviation of 7.2 percent. The market return is 13.4 percent and the risk-free rate is 2.8 percent. What is the portfolio's Jensen's alpha? A. 2.25 percent B. 2.51 percent C. 2.67 percent D. 3.36 percent E. 4.04 percent

D. 3.36 percent

A portfolio has a 2.5 percent chance of losing 16 percent or more according to the VaR when T = 1. This can be interpreted to mean that the portfolio is expected to have an annual loss of 16 percent or more once in every how many years? A. 1.0 B. 2.5 C. 25 D. 40 E. 100

D. 40

A portfolio has a Treynor ratio of .070, a standard deviation of 16.40 percent, a beta of 1.16, and an expected return of 14.3 percent. What is the risk-free rate? A. 1.32 percent B. 5.21 percent C. 5.39 percent D. 6.18 percent E. 6.41 percent

D. 6.18 percent

Which of the following measures are dependent upon the accuracy of a security's beta? I. Sharpe ratio II. Treynor ratio III. Jensen's alpha A. I only B. II only C. I and II only D. II and III only E. I, II, and III

D. II and III only

Which of the following are related to VaR analysis? I. beta II. standard deviation III. expected return IV. time A. I and III only B. II and IV only C. I, III, and IV only D. II, III, and IV only E. I, II, III, and IV

D. II, III, and IV only

Which one of the following assesses the ability of a money manager to balance high returns with an acceptable level of risk? A. probability analysis B. raw return ratio C. risk assessment D. performance evaluation E. market analysis

D. Performance evalutation

Which one of the following correctly states the VaR for a 3-year period with a 2.5 percent probability? A. Prob[Rp,T ≤ E(Rp) × 3 - 1.645 × σp √3] B. Prob[Rp,T ≤ E(Rp) × √3 - 1.645 × σp 3] C. Prob[Rp,T ≤ E(Rp) × √3 - 1.645 × σp √3] D. Prob[Rp,T ≤ E(Rp) × 3 - 1.960 × σp √3] E. Prob[Rp,T ≤ E(Rp) × √3 - 1.960 × σp 3]

D. Prob[Rp,T ≤ E(Rp) × 3 - 1.960 × σp √3]

Which metric describes the percentage of a fund's movement which can be explained by movements in the market? A. Jensen's alpha B. Information ratio C. Tracking error D. R Squared E. Treynor ratio

D. R Squared

The risk premium of a portfolio divided by the portfolio's standard deviation defines which one of the following performance measures? A. raw return B. Value at Risk C. Jensen's alpha D. Sharpe ratio E. Treynor ratio

D. Sharpe ratio

Which one of the following is probably the best measure of the performance of a well-diversified portfolio? A. Jensen's alpha B. Value at Risk C. Jensen-Treynor alpha D. Sharpe ratio E. Treynor ratio

D. Sharpe ratio

You are comparing three securities and discover they all have identical Treynor ratios. Given this information, which one of the following must be true regarding these three securities? A. They have identical betas. B. They have the same rates of return. C. They earn identical rewards per unit of total risk. D. They earn identical rewards per unit of systematic risk. E. They have identical Sharpe ratios also.

D. They earn identical rewards per unit of systematic risk.

Which one of the following statements is true concerning VaR? A. VaR ignores time. B. VaR only applies to time periods of one year. C. VaR applies only to time periods equal to or greater than one year. D. VaR values can be computed for monthly time periods. E. VaR is accurate only for time periods less than one year.

D. VaR values can be computed for monthly time periods.

Which one of the following is measured by the Jensen-Treynor alpha? A. total return relative to systematic risk B. risk premium relative to systematic C. risk premium relative to total risk D. excess return relative to systematic risk E. excess return relative to total risk

D. excess return relative to systematic risk

A portfolio has an expected annual return of 15.7 percent and a standard deviation of 19.6 percent. What is the smallest expected loss over the next calendar quarter given a probability of 1 percent? A. -15.11 percent B. -16.23 percent C. -16.49 percent D. -18.08 percent E. -18.87 percent

E. -18.87 percent

Which one of the following values would be the most preferable as a Sharpe ratio? A. -1.11 B. -0.89 C. 0.00 D. .10 E. 1.02

E. 1.02

A stock has a return of 16.9 percent, a standard deviation of 11.7 percent, and a beta of 1.50. The risk-free rate is 2.65 percent and the market risk premium is 8.45 percent. What is the Jensen-Treynor alpha of this stock? A. -1.37 percent B. -1.09 percent C. -0.48 percent D. 0.89 percent E. 1.05 percent

E. 1.05 percent

A portfolio has a Jensen's alpha of 0.82 percent, a beta of 1.40, and a CAPM expected return of 13.7 percent. The risk-free rate is 2.5 percent. What is the actual return of the portfolio? A. 15.5 percent B. 16.1 percent C. 16.8 percent D. 19.6 percent E. 21.9 percent

E. 21.9 percent

Your portfolio has an expected annual return of 11.6 percent. What is the two-year expected return? A. 11.60 percent B. 14.65 percent C. 16.40 percent D. 21.60 percent E. 23.20 percent

E. 23.20 percent

Which of the following measures should be used to determine if a security should be included in a master portfolio? I. Sharpe ratio II. Treynor ratio III. Jensen's alpha A. I only B. II only C. III only D. I and II only E. II and III only

E. II and III only

Which one of the following Value-at-Risk measures would be most appropriate for a portfolio designed for a very risk-adverse investor? A. Prob (Rp ≤ - .20) = 100% B. Prob (Rp ≤ - .15) = 50% C. Prob (Rp ≤ - .10) = 25% D. Prob (Rp ≤ - .10) = 10% E. Prob (Rp ≤ - .05) = 1%

E. Prob (Rp ≤ - .05) = 1%

You want to create the best portfolio that can be derived from two assets. Which one of the following will help you identify that portfolio? A. highest portfolio beta B. market equivalent level of risk C. highest possible rate of return D. Treynor-minimal portfolio E. Sharpe-optimal portfolio

E. Sharpe-optimal portfolio

You are comparing three assets which have differing Treynor ratios. Given this, which one of the following must be true? A. The assets may all be correctly priced if they have differing betas. B. The assets have differing rates of return. C. The assets have differing levels of market risk but equal amounts of total risk. D. The assets are all mispriced according to CAPM. E. The preferred investment is the asset with the highest Treynor ratio.

E. The preferred investment is the asset with the highest Treynor ratio.

Which one of the following is computed by dividing a portfolio's risk premium by the portfolio beta? A. raw return B. Value at Risk C. Jensen's alpha D. Sharpe ratio E. Treynor ratio

E. Treynor ratio

Which one of the following measures risk premium in relation to systematic risk? A. Value at Risk B. Jensen's alpha C. beta D. Sharpe ratio E. Treynor ratio

E. Treynor ratio

Which one of the following assesses risk by stating the probability of a loss a portfolio might incur within a stated time period given a specific probability? A. Sharpe ratio B. Jensen's alpha C. Treynor ratio D. raw return measurement E. Value-at-Risk

E. Value-at-Risk

The Sharpe ratio is best used to evaluate which one of the following? A. corporate bonds B. government bonds C. Treasury bills D. individual stocks E. diversified portfolios

E. diversified portfolios

A Sharpe-optimal portfolio provides which one of the following for a given set of securities? A. Jensen's Alpha B. highest possible level of risk C. highest level of return for a market-equivalent level of risk D. highest excess return per unit of systematic risk E. highest risk premium per unit of total risk

E. highest risk premium per unit of total risk

You are considering the purchase of a mutual fund. You have found three funds that meet your basic criteria. Each fund has a different alpha. Which alpha indicates the preferred investment? A. the most negative alpha B. the least negative alpha C. the zero alpha D. the lowest positive alpha E. the highest positive alpha

E. the highest positive alpha