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Exam 24: Portfolio Performance Evaluation

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Question 21

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Suppose you purchase one share of the stock of Cereal Correlation Company at the beginning of year 1 for $50. At the end of year 1, you receive a $1 dividend and buy one more share for $72. At the end of year 2, you receive total dividends of $2 (i.e., $1 for each share) and sell the shares for $67.20 each. The time-weighted return on your investment is

A) 10.0%.
B) 8.7%.
C) 19.7%.
D) 17.6%.

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Question 22

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The M² measure was developed by

A) Merton and Miller.
B) Miller and Miller.
C) Modigliani and Miller.
D) Modigliani and Modigliani.
E) the M&M Mars Company.

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Question 23

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You want to evaluate three mutual funds using the Sharpe measure for performance evaluation. The risk-free return during the sample period is 5%. The average returns, standard deviations, and betas for the three funds are given below, as are the data for the S&P 500 Index. $\begin{array}{c}\begin{array}{lll}\text { } \\\text { } \\\text { } \\\text { Fund A } \\\text { Fund B } \\\text { Fund C } \\\text { S\&P 500 } \\\end{array}\begin{array}{lll}\text { } \\\text { Average } \\\text {Return } \\23\% \\20\% \\19\% \\18\%\end{array}\begin{array}{lll}\text {Regidual}\\\text { Standand } \\\text { Deviation.} \\\text {30\% } \\\text {19\% } \\\text { 17\% } \\15\%\end{array}\begin{array}{lll}\text { } \\\text { } \\\text {Beta } \\\text { 1.3 } \\\text { 1.2 } \\\text { 1.1 } \\1.0\end{array}\end{array}$ The investment with the highest Sharpe measure is

The dollar-weighted return on a portfolio is equivalent to

The Sharpe, Treynor, and Jensen portfolio performance measures are derived from the CAPM,

The M-squared measure considers

Suppose two portfolios have the same average return and the same standard deviation of returns, but Aggie Fund has a higher beta than Raider Fund. According to the Treynor measure, the performance of Aggie Fund

The following data are available relating to the performance of Sooner Stock Fund and the market portfolio: $\begin{array}{lcc} & & \text { Market } \\ & \text { Sooner } & \text { Portfolio } \\\text { Average return } & 20 \% & 11 \% \\\text { Standard deviations of returns }& 44 \% & 19\% \\\text { Beta } & 1.8 & 1.0 \\\text { Residual standard deviation } & 2.0\% & 0.0\%\end{array}$ The risk-free return during the sample period was 3%. Calculate the Jensen measure of performance evaluation for Sooner Stock Fund.

The Jensen portfolio evaluation measure

Studies of style analysis have found that ________ of fund returns can be explained by asset allocation alone.

In measuring the comparative performance of different fund managers, the preferred method of calculating rate of return is

Suppose the risk-free return is 4%. The beta of a managed portfolio is 1.2, the alpha is 1%, and the average return is 14%. Based on Jensen's measure of portfolio performance, you would calculate the return on the market portfolio as

If an investor has a portfolio that has constant proportions in T-bills and the market portfolio, the portfolio's characteristic line will plot as a line with ___________. If the investor can time bull markets, the characteristic line will plot as a line with ___________.

To determine whether portfolio performance is statistically significant requires

Suppose you purchase one share of the stock of Volatile Engineering Corporation at the beginning of year 1 for $36. At the end of year 1, you receive a $2 dividend and buy one more share for $30. At the end of year 2, you receive total dividends of $4 (i.e., $2 for each share) and sell the shares for $36.45 each. The time-weighted return on your investment is

The following data are available relating to the performance of Monarch Stock Fund and the market portfolio: $\begin{array} { l c c } && { \text { Market } } \\& \text { Monarch } & \text { Portfolio } \\\text { Average return } & 16 \% & 12 \% \\\text { Standard deviations of returns } &26 \% & 22 \% \\\text { Beta } & 1.15 & 1.00 \\\text { Residual standard deviation } &1\%&0\%\\\end{array}$ The risk-free return during the sample period was 4%. Calculate Jensen's measure of performance for Monarch Stock Fund.

The comparison universe is not

Suppose two portfolios have the same average return and the same standard deviation of returns, but Buckeye Fund has a higher beta than Gator Fund. According to the Treynor measure, the performance of Buckeye Fund

The Value Line Index is an equally-weighted geometric average of the returns of about 1,700 firms. The value of an index based on the geometric average returns of three stocks where the returns on the three stocks during a given period were 32%, 5%, and 10%, respectively, is

Suppose a particular investment earns an arithmetic return of 10% in year 1, 20% in year 2, and 30% in year 3. The geometric average return for the period will be