FIN 334 Exam 3 Chapter 13

Correlation ranges from what to what?

-1 to +1

R-squared ranges from what to what?

0 to 100 percent

How is jensen's alpha interpreted?

A measure of by how much the portfolio "beat the market"

What does an R-squared of 100 indicate?

All movements in the security are driven by the market, indicating a correlation of -1 or +1

The information ratio also allows to compare investments with different what?

Alphas and tracking errors

Which things does the treynor ratio standardize?

Any excess return, relative to beta

If the returns on an investment follow a normal distribution, then we can state the probability that a portfolio's return will what?

Be within a certain range

In an active, competitive market, a strong argument can be made that all assets (and portfolios of these assets) should have the same treynor ratio, that is the same reward-to-risk ratio, where risk refers to systematic risk. To the extent that they don't, then there is evidence that at least some portfolios have what?

Earned excess returns

How do you determine if a fund's alpha is statistically significant from zero?

Evaluating the significance level of the alpha estimate that comes from the regression, or calculating the funds information ratio

What does the Jensen-Treynor alpha measure?

Excess return relative to beta, which is similar to the information ratio

Finding the sharpe-optimal portfolio boils down to what?

Finding the line with the steepest slope

Concerns a money manager's control over investment risks, usually with respect to potential short-run losses

Investment risk management

What does and does not the the Markowitz efficient frontier tell you?

It tells you which portfolios are efficient, but it does not tell you which of the efficient portfolios is the best

What is a strength of Jensen's alpha?

It's easy to interpret

If you took ____ and divide it by beta, then have a Jensen-Treynor alpha

Jensen's alpha

Which two performance measures are really very similar?

Jensen's alpha and the Treynor ratio

Taking jensen's alpha and dividing it by beta gives you what?

Jensen-Treynor alpha

What are advantages of the sharpe ratio?

No beta is necessary and standard deviations can be calculated unambiguously

Do all of the performance measures yield similar results?

No, not always

Are firms required to comply with GIPS? Explain.

No. Firms that do comply, though are recognized by the CFA institute which might give the firms more credibility among potential investors

A statistical model for assessing probabilities related to many phenomena, including security returns

Normal distribution

The assessment of how well a money manager achieves a balance between high returns and acceptable risks

Performance evaluation

The treynor ratio is a ___ ratio

Reward-to-risk

The sharpe ratio is a ____ ratio that focuses on ___ risk

Reward-to-risk; total

If you wish to select a performance measure to evaluate an entire portfolio held by an investor, the ___ ratio is appropriate

Sharpe

The ___ ratio is probably most appropriate for evaluating relatively diversified portfolios

Sharpe ratio

The treynor risk looks at ___ risk

Systematic risk only, not total risk

What does a relative measure mean?

That no absolute number represents a "good" or "bad" performance

A high r-squared value might suggest what?

That the performance measures (such as alpha) are more representative of potential longer-term performance

How is a measure of consistency implemented?

The CFA institute developed the Global Investment Performance Standards

How is jensen's alpha understood?

The excess return above or below the security market line

What does the slope of the characteristic line represent?

The investments beta

If two funds both have alphas of 1.5 percent which do you prefer, and why?

The one with the higher information ratio, because less risk, (or volatility) is associated with that fund

What does r-squared represent?

The percentage of the fund's movement that can be explained by the movements in the market

With relative measures, how is the performance evaluated then?

The ratios must be compared to those of other managers-or to a benchmark index

What does the characteristic line graph?

The relationship between the return of an investment (y axis) and the return of the market or benchmark (on the x axis)

How is the sortino ratio calculated?

The same way as the sharpe ratio, except you calculate the standard deviation using only returns that lie below the mean

Return standard deviation is a measure of what?

The total risk, (as opposed to systematic risk) for a security or a portfolio

What is a weakness of the jensen and treynor measures?

They both require a beta estimate, and betas from different sources can differ substantially

What is the purpose of the sortino ratio?

To penalize the investment manager for having undesirable volatility caused by negative excess returns

What is the purpose of the Global Investment Performance Standards?

To standardize the process to provide investors with the ability to make comparisons across managers

What is a drawback to the sharpe ratio?

Total risk is frequently not what really matters

The ___ ratio standardizes everything, including any excess return, relative to beta

Treynor

If you wish to choose a performance measure to individually evaluate securities or portfolios for possible inclusions in a broader, (or "master") portfolio, then with two performance measures are appropriate?

Treynor ratio or Jensen's alpha

In an active, competitive market, a strong argument can be made that all assets (and portfolios of these assets) should have the same ___ ratio, that is the same ___ ratio, where risk refers to ___ risk

Treynor ratio; reward-to-risk; systematic

Assesses risk by stating the probability of a loss a portfolio might experience within a fixed time horizon with a specified probability

Value-at-risk

Why is comparing investments sometimes difficult?

Various performance metrics can provide different rankings

Is it possible for a manager to have negative sharpe and treynor ratios and still be considered "good"?

Yes - relative measure

Suppose you have a fund whose returns are not consistently higher (or lower) that the market by a fixed amount. How could you estimate the funds alpha?

You would regress the excess return of that investment on the excess return of the market. The intercept of that equation is the fund's alpha

The information ratio allows to compare investments that have the same what?

alpha

The information ratio will always have the same sign as the ___

alpha

Undesirable volatility caused by negative excess returns

downside risk

Alpha divided by tracking error

information ratio

Measures investment performance as the raw portfolio return less the return predicted by the capital asset pricing model

jensen's alpha

The fact that a raw portfolio does not reflect any consideration of risk suggests that its usefulness is ____ when making investment decisions

limited

Beta gives us the ___ movement in the return of the stock for a given movement in the market or benchmark

predicted

A portfolio's or security's squared correlation to the market or benchmark

r-squared

States the total percentage return on an investment with no adjustment for risk or comparison to any benchmark

raw return

The sharpe ratio is a ___ measure

relative

The treynor ratio is a ___ measure

relative

A basic measure of investment performance that includes an adjustment for risk

sharpe ratio

Measures investment performance as the ratio of portfolio risk premium over portfolio return standard deviation

sharpe ratio

When evaluating something like a mutual fund, which performance measure is most frequently used?

sharpe ratio

A measurement of how volatile a portfolio is relative to its benchmark

tracking error

Measures investment performance as the ratio of portfolio risk premium over portfolio beta

treynor ratio