Investments Chapter 13

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

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

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

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

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 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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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 See Section 13.2

D

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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 See Section 13.1

E

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