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Exam 18: Portfolio Performance Evaluation

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Question 1

Multiple Choice

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Consider the theory of active portfolio management. Shares A and B have the same positive alpha and the same non-systematic risk. Share A has a higher beta than share B. You should want ________ in your active portfolio.

A) equal proportions of Shares A and B
B) more of Share A than Share B
C) more of Share B than Share A
D) more information is needed to answer this question

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Question 2

Multiple Choice

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Suppose that over the same period two portfolios have the same average return and the same standard deviation of return, but Portfolio A has a higher beta than Portfolio B. According to the Sharpe measure, the performance of Portfolio A ________.

A) is better than the performance of Portfolio B
B) is the same as the performance of Portfolio B
C) is poorer than the performance of Portfolio B
D) cannot be measured since there is no data on the alpha of the portfolio

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Question 3

Multiple Choice

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In the Treynor-Black model, the weight of each analysed security in the portfolio should be proportional to its ________.

Perfect timing ability is equivalent to having ________ on the market portfolio.

What is the contribution of security selection to relative performance?

Portfolio managers Paul Martin and Kevin Krueger each manage $1 000 000 funds. Paul Martin has perfect foresight and the call option value of his perfect foresight is $150 000. Kevin Krueger is an imperfect forecaster and correctly predicts 50% of all bull markets and 70% of all bear markets. The value of Kevin Krueger's imperfect forecasting ability is ________.

A portfolio generates an annual return of 13%, a beta of 0.7 and a standard deviation of 17%. The market index return is 14% and has a standard deviation of 21%. What is the M² measure of the portfolio if the risk-free rate is 5%?

It is very hard to statistically verify abnormal fund performance because of all except which one of the following?

A portfolio generates an annual return of 17%, a beta of 1.2 and a standard deviation of 19%. The market index return is 12% and has a standard deviation of 16%. What is the M² measure of the portfolio if the risk-free rate is 4%?

The comparison universe is ________.

A managed portfolio has a standard deviation equal to 22% and a beta of 0.9 when the market portfolio's standard deviation is 26%. The adjusted portfolio P________ needed to calculate the M² measure will have ________ invested in the managed portfolio and the rest in T-bonds.

Henriksson found that, on average, betas of funds ________ during market advances.

Shares A and B have alphas of .01 and betas of .90. Share A has a residual variance of .020 while share B has a residual variance of .016. If Share A represents 2% of an active portfolio, share B should represent ________ of an active portfolio.

The average returns, standard deviations and betas for three funds are given below along with data for the S&P 500 index. The risk-free return during the sample period is 6%. You wish to evaluate the three mutual funds using the Treynor measure for performance evaluation. The fund with the highest Treynor measure of performance is ________.

A portfolio generates an annual return of 13%, a beta of 0.7 and a standard deviation of 17%. The market index return is 14% and has a standard deviation of 21%. What is the Treynor measure of the portfolio if the risk-free rate is 5%?

The M² measure is a variant of ________.

The portfolio that contains the benchmark asset allocation against which a manager will be measured is often called ________.

A market timing strategy is one where asset allocation in the share market ________ when one forecasts the share market will outperform treasury bonds.

The risk-free rate, average returns, standard deviations and betas for three funds and the S&P500 are given below. What is the T² measure for Portfolio A?

Consider the theory of active portfolio management. Shares A and B have the same beta and the same positive alpha. Share A has higher non-systematic risk than share B. You should want ________ in your active portfolio.