Chapter 25

Suppose the expected return for the market portfolio and risk-free rate are 13% and 3% respectively. Stocks A, B, and C have Treynor measures of 0.24, 0.16, and 0.11, respectively. Based on this information an investor should Buy stocks A, B, and C Buy stocks A and B and sell stock C Buy stock A and sell stocks B and C Sell stocks A, B, and C Hold stocks A, B, and C

Buy stocks A, B, and C

Which of the following statements about returns-based analysis or effective mix analysis is true? This analysis compares the historical return pattern of the portfolio in question with the historical returns of various well-specified indexes. This analysis uses sophisticated quadratic programming techniques to indicate what styles or style combinations were most similar to the portfolio's actual historical returns. This analysis is based on the belief that the portfolio's current make-up will be a good predictor for the next period's returns. Choices a and b All of the above statements describe returns-based analysis or effective mix analysis

Choices a and b

Excess return portfolio performance measures Adjust portfolio risk to match benchmark risk. Compare portfolio returns to expected returns under CAPM. Evaluate portfolio performance on the basis of return per unit of risk. Indicate historic average differential return per unit of historic variability of differential return. None of the above.

Compare portfolio returns to expected returns under CAPM.

The major requirements of a portfolio manager include the following, except Follow the client's policy statement. Completely diversify the portfolio to eliminate all unsystematic risk. The ability to derive above-average risk adjusted returns. Completely diversify the portfolio to eliminate all systematic risk. None of the above (that is, all are requirements of a portfolio manager)

Completely diversify the portfolio to eliminate all systematic risk.

Treynor showed that rational, risk averse investors always prefer portfolio possibility lines that have Zero slopes. Slightly negative slopes. Highly negative slopes. Slightly positive slopes. Highly positive slopes.

Highly positive slopes.

Bailey, Richards, and Tierney maintain that any useful benchmark should have the following characteristics: Measurable. Investable. Value-weighted. a and b. a, b and c.

a and b.

A manager's superior returns could have occurred due to: an insightful asset allocation strategy, over weighting an asset class that earned high returns. investing in undervalued sectors. selecting individual securities that earned above average returns. Choices a and c All of the above

All of the above

Which of the following statements concerning performance measures is false? The Treynor measure examines systematic risk. The Jensen measure examines systematic risk. All three measures examine both unsystematic and systematic risk. None of the above (that is, all statements are true)

All three measures examine both unsystematic and systematic risk.

Under the performance attribution analysis method, the ____ measures the manager's decision to over- or underweight a particular market segment in terms of that segment's return performance relative to the overall return to the benchmark. Selection effect Allocation effect Distribution effect Diversification effect Attribution effect

Allocation effect

The Sortino measure differs from the Sharpe ratio in that It measures the portfolio's average return in excess of a user-selected minimum acceptable return threshold. It measures the downside risk in a portfolio. Higher values of the Sortino measure are not desirable, while higher values in the Sharpe ratio are desirable. Both a and b. All of the above.

Both a and b.

Portfolio managers who anticipate an increase in interest rates should Act to keep the duration constant. Decrease the portfolio duration. Increase the portfolio duration. Assume higher risk in the market. Invest in junk bonds.

Decrease the portfolio duration.

Relative return portfolio performance measures Adjust portfolio risk to match benchmark risk. Compare portfolio returns to expected returns under CAPM. Evaluate portfolio performance on the basis of return per unit of risk. Indicate historic average differential return per unit of historic variability of differential return. None of the above.

Evaluate portfolio performance on the basis of return per unit of risk.

Information ratio portfolio performance measures Adjust portfolio risk to match benchmark risk. Compare portfolio returns to expected returns under CAPM. Evaluate portfolio performance on the basis of return per unit of risk. Indicate historic average differential return per unit of historic variability of differential return. None of the above.

Indicate historic average differential return per unit of historic variability of differential return.

Which portfolio measurement uses the mean excess return in the numerator divided by the amount of residual risk that the investor incurred in pursuit of those excess returns? Jensen measure. Fama measure. Sharpe measure. Treynor ratio. Information ratio.

Information ratio.

Which measure of portfolio performance allows analysts to determine the statistical significance of abnormal returns? Sharpe measure Jensen measure Fama measure Alternative components model (MCV) Treynor measure

Jensen measure

Which of the following performance measures is the most rigorous risk-adjustment process separating systematic and unsystematic risk? Treynor ratio Sharpe ratio Jensen's Alpha Information ratio 7 of 22 None of the above

Jensen's Alpha

Selectivity measures how well a portfolio performed relative to a Market portfolio (S&P 400). Portfolio of the same securities in the previous period. Naively selected portfolio of equal risk. Naively selected portfolio of equal return. World market portfolio.

Naively selected portfolio of equal risk.

Portfolio managers are often evaluated using a boxplot of returns for a universe of investors over a specific period of time which is known as a(n) Return adjusted comparison Efficient frontier comparison Time plot comparison Peer group comparison None of the above

Peer group comparison

A portfolio performance measurement technique that decomposes the return of a manager's holdings to a predetermined benchmark's returns and separates the difference into an allocation and selection is called Immunization analysis. Performance attribution analysis. Tactical rankings. Convexity utilization. Duration matching attrition.

Performance attribution analysis.

In the Grinblatt-Titman (GT) performance measure, Portfolio performance is measured by assessing the quality of services provided by money managers by looking at adjustments made to the content of their portfolios. Portfolio performance is measured by examining both unsystematic and systematic risk. Portfolio performance is measured by comparing the returns of each stock in the portfolio to the return of a benchmark portfolio. With the same aggregate investment characteristics as the security in question. Portfolio performance is measured on the basis of return per unit of risk. Portfolio performance is measured on the basis of historic average differential return per unit of historic variability of differential return.

Portfolio performance is measured by assessing the quality of services provided by money managers by looking at adjustments made to the content of their portfolios.

In the Characteristic Selectivity (CS) performance measure, Portfolio performance is measured by assessing the quality of services provided by money managers by looking at adjustments made to the content of their portfolios. Portfolio performance is measured by examining both unsystematic and systematic risk. Portfolio performance is measured by comparing the returns of each stock in the portfolio to the return of a benchmark portfolio. With the same aggregate investment characteristics as the security in question. Portfolio performance is measured on the basis of return per unit of risk. Portfolio performance is measured on the basis of historic average differential return per unit of historic variability of differential return.

Portfolio performance is measured by comparing the returns of each stock in the portfolio to the return of a benchmark portfolio. With the same aggregate investment characteristics as the security in question.

Wagner and Tito suggested that a bond portfolio return differing from the return from the Lehman Brothers Index can be divided into four components. Which of the following is not included? Policy effect Rate anticipation effect Sector/Quality effect Analysis effect Trading effect

Sector/Quality effect

Under the performance attribution analysis method, the ____ measures the manager's ability to form specific market segment portfolios that generate superior returns relative to the way in which the comparable market segment is defined in the benchmark portfolio weighted by the manager's actual market segment investment proportions. Selection effect Allocation effect Distribution effect Diversification effect Attribution effect

Selection effect

Sharpe's performance measure divides the portfolio's risk premium by the Standard deviation of the rate of return. Variance of the rate of return. Slope of the fund's characteristic line. Beta. Risk free rate.

Standard deviation of the rate of return.

For a poorly diversified portfolio the appropriate measure of portfolio performance would be The Treynor measure because it evaluates portfolio performance on the basis of return and diversification. The Sharpe measure because it evaluates portfolio performance on the basis of return and diversification. The Treynor measure because it uses standard deviation as the risk measure. The Sharpe measure because it uses beta as the risk measure. None of the above.

The Sharpe measure because it evaluates portfolio performance on the basis of return and diversification.

In the evaluation of bond portfolio performance, the policy effect refers to The difference in portfolio duration and index duration. The extra return attributable to acquiring bonds that are temporarily mispriced relative to risk. Short-run changes in the portfolio during a specific period. The differential return from changing duration of the portfolio during a specific period. None of the above.

The difference in portfolio duration and index duration.

In the evaluation of bond portfolio performance, the interest rate anticipation effect refers to The difference in portfolio duration and index duration. The extra return attributable to acquiring bonds that are temporarily mispriced relative to risk. Short-run changes in the portfolio during a specific period. The differential return from changing duration of the portfolio during a specific period. None of the above

The differential return from changing duration of the portfolio during a specific period.

In the evaluation of bond portfolio performance, the analysis effect refers to The difference in portfolio duration and index duration. The extra return attributable to acquiring bonds that are temporarily mispriced relative to risk. Short-run changes in the portfolio during a specific period. The differential return from changing duration of the portfolio during a specific period. None of the above

The extra return attributable to acquiring bonds that are temporarily mispriced relative to risk.

A disadvantage of the Treynor and Sharpe measures is that They produce absolute performance rankings. The beta and standard deviation are static. They are both difficult to compute. They produce relative performance rankings. They give very different measurements for well-diversified portfolios.

They produce relative performance rankings.

A more recent adjustment to the Sharpe measurement for portfolio evaluation is To divide the portfolio risk premium by total risk rather than the portfolio's beta. To divide the portfolio risk premium by standard deviation rather than the portfolio's beta. To divide the portfolio risk premium by the excess portfolio return rather than total risk. To divide the excess portfolio return by the portfolio's standard deviation. To divide the excess portfolio return by the portfolio's beta.

To divide the portfolio risk premium by the excess portfolio return rather than total risk.

The cost of active management is the coefficient sER and it is sometimes referred to as Market timing. Reward for risk. Excess reward. Excess risk. Tracking error.

Tracking error.

The measure of performance which divides the portfolio's risk premium by the portfolio's beta is the Sharpe measure. Jensen measure. Fama measure. Alternative components model (MCV). Treynor measure.

Treynor measure.

If the return increases as more global investments with low correlation are added to the market portfolio, the efficient frontier moves Up and right. Up and left. Down and right. Down and left. Up only.

Up and left

Components of overall portfolio performance include Selectivity. Manager's risk. Security risk. a and b. a, b and c.

a and b.

A portfolio's gross selectivity is made up of Manager's risk. Net selectivity. Diversification. a and b. b and c.

b and c.