Multiple Choice Questions
1. A mutual fund with a beta of 1.1 has outperformed the S&P 500 over the last 20 years. We
know that this mutual fund manager _____.
A. must have had superior stock selection ability.
B. must have had superior asset allocation ability.
C. must have had superior timing ability.
D. may or may not have outperformed the S&P 500 on a risk-adjusted basis.
Answer: D. may or may not have outperformed the S&P 500 on a risk-adjusted basis.
2. The comparison universe is __________.
A. the bogey portfolio
B. a set of mutual funds with similar risk characteristics to your mutual fund
C. the set of all mutual funds in the United States
D. the set of all mutual funds in the world
Answer: B. a set of mutual funds with similar risk characteristics to your mutual fund
3. Which one of the following performance measures is the Sharpe ratio?
A. Average excess return to beta ratio
B. Average excess return to standard deviation ratio
C. Alpha to standard deviation of residuals ratio
D. Average return minus required return
Answer: B. Average excess return to standard deviation ratio
4. The M2 measure is a variant of ________________.
A. the Sharpe measure
B. the Treynor measure
C. Jensen's alpha
D. the appraisal ratio
Answer: A. the Sharpe measure
5. A managed portfolio has a standard deviation equal to 22% and a beta of .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-bills.
A. 84.6%
B. 118%
C. 18%
D. 15.4%
Answer: B. 118%
w(σP) = σM, or 22w = 26, so the weight in the managed portfolio is 26/22 = 118%.
6. Your return will generally be higher using the __________ if you time your transactions
poorly, and your return will generally be higher using the __________ if you time your
transactions well.
A. dollar-weighted return method; dollar-weighted return method
B. dollar-weighted return method; time-weighted return method
C. time-weighted return method; dollar-weighted return method
D. time-weighted return method; time-weighted return method
Answer: C. time-weighted return method; dollar-weighted return method
7. Consider the Sharpe and Treynor performance measures. When a pension fund is large and
well diversified in total and it has many managers, the __________ measure is better for
evaluating individual managers while the __________ measure is better for evaluating the
manager of a small fund with only one manager responsible for all investments, which may
not be fully diversified.
A. Sharpe; Sharpe
B. Sharpe; Treynor
C. Treynor; Sharpe
D. Treynor; Treynor
Answer: C. Treynor; Sharpe
8. Consider the theory of active portfolio management. Stocks A and B have the same beta
and the same positive alpha. Stock A has higher nonsystematic risk than stock B. You should
want __________ in your active portfolio.
A. equal proportions of stocks A and B
B. more of stock A than stock B
C. more of stock B than stock A
D. The answer cannot be determined from the information given.
Answer: C. more of stock B than stock A
9. Suppose that over the same time 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 ratio, 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
Answer: B. is the same as the performance of portfolio B
10. Which model is preferred by academics, and is gaining in popularity with practitioners,
when evaluating investment performance?
A. The Treynor-Black model
B. The single-index model
C. The Fama-French three-factor model
D. The Sharpe model
Answer: C. The Fama-French three-factor model
11. The risk-free rate, average returns, standard deviations, and betas for three funds and the
S&P 500 are given below.
What is the Treynor measure for portfolio A?
A. 12.38%
B. 2.38%
C. .91%
D. 3.64%
Answer: A. 12.38%
12. The risk-free rate, average returns, standard deviations, and betas for three funds and the
S&P 500 are given below.
What is the M2 measure for portfolio B?
A. .43%
B. 1.25%
C. 1.77%
D. 1.43%
Answer: D. 1.43%
13. The risk-free rate, average returns, standard deviations, and betas for three funds and the
S&P 500 are given below.
If these portfolios are subcomponents that make up part of a well-diversified portfolio, then
portfolio ______ is preferred.
A. A
B. B
C. C
D. S&P 500
Answer: B. B
Use the Treynor measure. Portfolio B is preferred.
14. The risk-free rate, average returns, standard deviations, and betas for three funds and the
S&P 500 are given below.
Based on the M2 measure, portfolio C has a superior return of _____ as compared to the S&P
500.
A. -1.33%
B. 1.43%
C. 2%
D. 0%
Answer: C. 2%
15. Which one of the following is largely based on forecasts of macroeconomic factors?
A. Security selection
B. Passive investing
C. Market efficiency
D. Market timing
Answer: D. Market timing
16. Based on the example used in the book, a perfect market timer would have made _______
by 2008 on a $1 investment made in 1926.
A. $100
B. $1,626
C. $1.5 million
D. $36.7 billion
Answer: D. $36.7 billion
17. 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 want to evaluate the three mutual funds using the Sharpe ratio for performance
evaluation. The fund with the highest Sharpe ratio of performance is __________.
A. fund A
B. fund B
C. fund C
D. The answer cannot be determined from the information given.
Answer: B. fund B
18. 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 want to evaluate the three mutual funds using the Treynor measure for performance
evaluation. The fund with the highest Treynor measure of performance is __________.
A. fund A
B. fund B
C. fund C
D. The answer cannot be determined from the information given.
Answer: B. fund B
19. 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 want to evaluate the three mutual funds using the Jensen measure for performance
evaluation. The fund with the highest Jensen measure of performance is __________.
A. fund A
B. fund B
C. fund C
D. S&P 500
Answer: B. fund B
20. In a particular year, Salmon Arm Mutual Fund earned a return of 16% by making the
following investments in asset classes:
The return on a bogey portfolio was 12%, based on the following:
The total excess return on the managed portfolio was __________.
A. 2%
B. 3%
C. 4%
D. 5%
Answer: C. 4%
Return on the managed portfolio = .2 × 12% + .8 × 17% = 16%
Excess Return = .16% - 12% = 4%
21. In a particular year, Salmon Arm Mutual Fund earned a return of 16% by making the
following investments in asset classes:
The return on a bogey portfolio was 12%, based on the following:
The contribution of asset allocation across markets to the total excess return was __________.
A. 1.5%
B. 2%
C. 2.5%
D. 3.5%
Answer: B. 2%
(.20 - .60)(.10) + (.80 - .40)(.15) = .02
22. In a particular year, Salmon Arm Mutual Fund earned a return of 16% by making the
following investments in asset classes:
The return on a bogey portfolio was 12%, based on the following:
The contribution of security selection within asset classes to the total excess return was
__________.
A. 1.5%
B. 2%
C. 2.5%
D. 3.5%
Answer: B. 2%
(.12 - .10).20 + (.17 - .15).80 = .02
23. In a particular year, Lost Hope Mutual Fund made the following investments in asset
classes:
The return on a bogey portfolio was 12%, based on the following:
The total extra return on the managed portfolio was __________.
A. 1%
B. 2%
C. 3%
D. 4%
Answer: A. 1%
Excess return = (.8)(.09) + (.2)(.04) - .07 = .01
24. In a particular year, Lost Hope Mutual Fund made the following investments in asset
classes:
The return on a bogey portfolio was 12%, based on the following:
The contribution of asset allocation across markets to the total extra return was __________.
A. -1%
B. 0%
C. 1%
D. 2%
Answer: D. 2%
(.80 - .40)(.10) + (.20 - .60)(.05) = .02
25. In a particular year, Lost Hope Mutual Fund made the following investments in asset
classes:
The return on a bogey portfolio was 12%, based on the following:
The contribution of security selection within asset classes to the total extra return was
__________.
A. -1%
B. 0%
C. 1%
D. 2%
Answer: A. -1%
(.09 - .10).8 + (.04 - .05).2 = -.01
26. Which one of the following averaging methods is the preferred method of constructing
returns series for use in evaluating portfolio performance?
A. Geometric average
B. Arithmetic average
C. Dollar weighted
D. Internal
Answer: A. Geometric average
27. The __________ calculates the reward to risk trade-off by dividing the average portfolio
excess return by the portfolio beta.
A. Sharpe ratio
B. Treynor measure
C. Jensen measure
D. appraisal ratio
Answer: B. Treynor measure
28. 28. In creating the P* portfolio, one mixes the original portfolio P and T-bills to match the
_________ of the market.
A. alpha
B. beta
C. excess return
D. standard deviation
Answer: D. standard deviation
29. The M2 measure of portfolio performance was developed by ______________.
A. Modigliani and Miller
B. Modigliani and Modigliani
C. Merton and Miller
D. Fama and French
Answer: B. Modigliani and Modigliani
30. Probably the biggest problem with evaluating the portfolio performance of actively
managed funds is the assumption that __________________________.
A. the markets are efficient
B. portfolio risk is constant over time
C. diversification pays off
D. security selection is more valuable than asset allocation
Answer: B. portfolio risk is constant over time
31. Perfect-timing ability is equivalent to having __________ on the market portfolio.
A. a call option
B. a futures contract
C. a put option
D. a forward contract
Answer: A. a call option
32. One hundred fund managers enter a contest to see how many times in 13 years they can
earn a higher return than their competitors. The probability distribution of the number of
successful years out of 13 for the best-performing money managers is
Out of this sample, chance alone would indicate that there is a ______ probability that
someone would beat the market at least 11 times out of 13 years.
A. 51.3%
B. 65.9%
C. 67.1%
D. 10.83%
Answer: C. 67.1%
Probability = 51.3% + 14.6% + 1.2% = 67.1%
33. The Treynor-Black model is a model that shows how an investment manager can use
security analysis and statistics to construct __________.
A. a market portfolio
B. a passive portfolio
C. an active portfolio
D. an index portfolio
Answer: C. an active portfolio
34. If an investor is a successful market timer, his distribution of monthly portfolio returns
will __________.
A. be skewed to the left
B. be skewed to the right
C. exhibit kurtosis
D. exhibit neither skewness nor kurtosis
Answer: B. be skewed to the right
35. Recent analysis indicates that the style of investing is a critical component of fund
performance. In fact, on average about _____ of fund performance is attributable to the asset
allocation decision.
A. 68%
B. 74%
C. 88%
D. 97%
Answer: D. 97%
36. In the Treynor-Black model, the active portfolio will contain stocks with __________.
A. alphas equal to zero
B. negative alphas
C. positive alphas
D. some negative and some positive alphas
Answer: C. positive alphas
37. Portfolio performance is often decomposed into various subcomponents, such as the
return due to:
I. Broad asset allocation across security classes
II. Sector weightings within equity markets
III. Security selection with a given sector
The one decision that contributes most to the fund performance is _____.
A. I
B. II
C. III
D. All contribute equally to fund performance.
Answer: A. I
38. The theory of efficient frontiers has __________.
A. no adherents among practitioners
B. a small number of adherents among practitioners
C. a significant number of adherents among practitioners
D. complete support by practitioners
Answer: C. a significant number of adherents among practitioners
39. In the Treynor-Black model, security analysts __________.
A. analyze a relatively small number of stocks
B. analyze all stocks that are publicly traded
C. are redundant
D. devote their attention to market timing rather than fundamental analysis
Answer: A. analyze a relatively small number of stocks
40. In the Treynor-Black model, security analysts __________.
A. analyze the entire universe of stocks
B. assume that markets are inefficient
C. treat market index as a baseline portfolio from which an active portfolio is constructed
D. focus on selecting the best-performing bogey
Answer: C. treat market index as a baseline portfolio from which an active portfolio is
constructed
41. Active portfolio management consists of:
I. Market timing
II. Security selection
III. Sector selection within given markets
IV. Indexing
A. I and II only
B. II and III only
C. I, II, and III only
D. I, II, III, and IV
Answer: C. I, II, and III only
42. A market-timing strategy is one in which asset allocation in the stock market __________
when one forecasts that the stock market will outperform Treasury bills.
A. decreases
B. increases
C. remains the same
D. may increase or decrease
Answer: B. increases
43. In the Treynor-Black model, the contribution of individual security to the active portfolio
should be based primarily on the stock's _________.
A. alpha
B. beta
C. residual variance
D. information ratio
Answer: D. information ratio
44. If all ______ are ______ in the Treynor-Black model, there would be no reason to depart
from the passive portfolio.
A. alphas; zero
B. alphas; positive
C. betas; positive
D. standard deviations; positive
Answer: A. alphas; zero
45. In the Treynor-Black model, the weight of each analyzed security in the portfolio should
be proportional to its __________.
A. alpha/beta
B. alpha/residual variance
C. beta/residual variance
D. none of these options
Answer: B. alpha/residual variance
46. The critical variable in the determination of the success of the active portfolio is the
stock's __________.
A. alpha/nonsystematic risk ratio
B. alpha/systematic risk ratio
C. delta/nonsystematic risk ratio
D. delta/systematic risk ratio
Answer: A. alpha/nonsystematic risk ratio
47. Consider the theory of active portfolio management. Stocks A and B have the same
positive alpha and the same nonsystematic risk. Stock A has a higher beta than stock B. You
should want __________ in your active portfolio.
A. equal proportions of stocks A and B
B. more of stock A than stock B
C. more of stock B than stock A
D. The answer cannot be determined from the information given.
Answer: A. equal proportions of stocks A and B
48. Consider the theory of active portfolio management. Stocks A and B have the same beta
and nonsystematic risk. Stock A has a higher positive alpha than stock B. You should want
__________ in your active portfolio.
A. equal proportions of stocks A and B
B. more of stock A than stock B
C. more of stock B than stock A
D. The answer cannot be determined from the information given.
Answer: B. more of stock A than stock B
49. The market-timing form of active portfolio management relies on __________
forecasting, and the security selection form of active portfolio management relies on
__________ forecasting.
A. macroeconomic; macroeconomic
B. macroeconomic; microeconomic
C. microeconomic; macroeconomic
D. microeconomic; microeconomic
Answer: B. macroeconomic; microeconomic
50. Active portfolio managers try to construct a risky portfolio with _______.
A. a higher Sharpe ratio than a passive strategy
B. a lower Sharpe ratio than a passive strategy
C. the same Sharpe ratio as a passive strategy
D. very few securities
Answer: A. a higher Sharpe ratio than a passive strategy
51. In performance measurement, the bogey portfolio is designed to _________.
A. measure the returns to a completely passive strategy
B. measure the returns to a similar active strategy
C. measure the returns to a given investment style
D. equal the return on the S&P 500
Answer: A. measure the returns to a completely passive strategy
52. __________ portfolio managers experience streaks of abnormal returns that are hard to
label as lucky outcomes, and _________ anomalies in realized returns have been sufficiently
persistent that portfolio managers could use them to beat a passive strategy over prolonged
periods.
A. No; no
B. No; some
C. Some; no
D. Some; some
Answer: D. Some; some
53. A passive benchmark portfolio is:
I. A portfolio in which the asset allocation across broad asset classes is neutral and not
determined by forecasts of performance of the different asset classes
II. One in which an indexed portfolio is held within each asset class
III. Often called the bogey
A. I only
B. I and III only
C. II and III only
D. I, II, and III
Answer: D. I, II, and III
54. The correct measure of timing ability is ____________ for a portfolio manager who
correctly forecasts 55% of bull markets and 55% of bear markets.
A. -5%
B. 5%
C. 10%
D. 95%
Answer: C. 10%
Timing ability = .55 + .55 - 1 = .1
55. It is very hard to statistically verify abnormal fund performance because of all of the
following except which one?
A. Inevitably, some fund managers experience streaks of good performance that may just be
due to luck.
B. The noise in realized rates of return is so large as to make it hard to identify abnormal
performance in competitive markets.
C. Portfolio composition is rarely stable long enough to identify abnormal performance.
D. Even if successful, there is really not much value to be added by active strategies such as
market timing.
Answer: D. Even if successful, there is really not much value to be added by active strategies
such as market timing.
56. The term alpha transport refers to _____.
A. establishing alpha and then using index products to hedge market exposure and reduce
exposure to particular sectors.
B. establishing alpha and then using sector mutual funds to hedge market exposure and reduce
exposure to the general market.
C. establishing alpha and then using sector mutual funds to hedge market exposure and gain
exposure to the general market.
D. establishing alpha and then using index products to hedge market exposure and gain
exposure to particular sectors.
Answer: D. establishing alpha and then using index products to hedge market exposure and
gain exposure to particular sectors.
57. Portfolio managers Martin and Krueger each manage $1 million funds. Martin has perfect
foresight, and the call option value of his perfect foresight is $150,000. Krueger is an
imperfect forecaster and correctly predicts 50% of all bull markets and 70% of all bear
markets. The correct measure of timing ability for Krueger is __________.
A. 20%
B. 60%
C. 75%
D. 120%
Answer: A. 20%
Timing ability = .5 + .7 - 1 = .2
58. Portfolio managers Martin and Krueger each manage $1 million funds. Martin has perfect
foresight, and the call option value of his perfect foresight is $150,000. Krueger is an
imperfect forecaster and correctly predicts 50% of all bull markets and 70% of all bear
markets. The value of Krueger's imperfect forecasting ability is __________.
A. $30,000
B. $67,500
C. $108,750
D. $217,500
Answer: A. $30,000
Value of imperfect forecasting = (.5 + .7 - 1) × $150,000 = $30,000
59. Douglass, an imperfect forecaster, correctly predicts 57% of all bull markets and 68% of
all bear markets. Simmonds is a perfect forecaster. If Douglass is able to charge a fee of
$125,000, the fee that Roy Simmonds should charge is __________. Assume that both
forecasters manage similar-size funds.
A. $31,250
B. $200,000
C. $500,000
D. $625,000
Answer: C. $500,000
60. A mutual fund invests in large-capitalization stocks. Its performance should be measured
against which one of the following?
A. Russell 2000 Index
B. S&P 500 Index
C. Wilshire 5000 Index
D. Dow Jones Industrial Average
Answer: B. S&P 500 Index
61. Assume you purchased a rental property for $100,000 and sold it 1 year later for $115,000
(there was no mortgage on the property). At the time of the sale, you paid $3,000 in
commissions and $1,000 in taxes. If you received $10,000 in rental income (all received at the
end of the year), what annual rate of return did you earn?
A. 6%
B. 11%
C. 21%
D. 25%
Answer: C. 21%
$100,000(1 + r)1 = ($115,000 - 3,000 - 1,000) + 10,000
$100,000(1 + r)1 = $121,000
r = 21%
62. The table presents the actual return of each sector of the manager's portfolio in column
(1), the fraction of the portfolio allocated to each sector in column (2), the benchmark or
neutral sector allocations in column (3), and the returns of sector indexes in column 4.
What was the manager's return in the month?
A. 2.07%
B. 2.21%
C. 2.24%
D. 4.8%
Answer: C. 2.24%
Actual = .6 × 3% + .3 × 1.3% + .1 × .5% = 2.24%
63. The table presents the actual return of each sector of the manager's portfolio in column
(1), the fraction of the portfolio allocated to each sector in column (2), the benchmark or
neutral sector allocations in column (3), and the returns of sector indexes in column 4.
What was the bogey's return in the month?
A. 2.07%
B. 2.21%
C. 2.24%
D. 4.8%
Answer: B. 2.21%
Bogey = .5 × 3.2% + .4 × 1.4% + .1 × .5% = 2.21%
64. The table presents the actual return of each sector of the manager's portfolio in column
(1), the fraction of the portfolio allocated to each sector in column (2), the benchmark or
neutral sector allocations in column (3), and the returns of sector indexes in column 4.
What was the manager's over- or underperformance for the month?
A. Underperformance = .03%
B. Overperformance = .03%
C. Overperformance = .14%
D. Underperformance = 3%
Answer: B. Overperformance = .03%
Overperformance = Actual - Bogey = 2.24% - 2.21% = .03%
65. The table presents the actual return of each sector of the manager's portfolio in column
(1), the fraction of the portfolio allocated to each sector in column (2), the benchmark or
neutral sector allocations in column (3), and the returns of sector indexes in column 4.
What is the contribution of security selection to relative performance?
A. -.15%
B. .15%
C. -.3%
D. .3%
Answer: A. -.15%
66. The table presents the actual return of each sector of the manager's portfolio in column
(1), the fraction of the portfolio allocated to each sector in column (2), the benchmark or
neutral sector allocations in column (3), and the returns of sector indexes in column 4.
What is the contribution of asset allocation to relative performance?
A. -.18%
B. .18%
C. -.15%
D. .15%
Answer: B. .18%
67. Morningstar's RAR produce results that are similar but not identical to ________.
A. Jensen's alpha
B. M2
C. the Treynor ratio
D. the Sharpe ratio
Answer: D. the Sharpe ratio
68. The Treynor-Black model assumes that security markets are _________.
A. completely efficient
B. nearly efficient
C. very inefficient
D. random walks
Answer: B. nearly efficient
69. The information ratio is equal to the stock's ____ divided by its ______.
A. diversifiable risk; beta
B. beta; alpha
C. alpha; beta
D. alpha; diversifiable risk
Answer: D. alpha; diversifiable risk
70. Empirical tests to date show ______________.
A. that many investors have earned large rewards by market timing
B. little evidence of market-timing ability
C. clear-cut evidence of substantial market-timing ability
D. evidence that absolutely no market-timing ability exists
Answer: B. little evidence of market-timing ability
71. A portfolio generates an annual return of 13%, a beta of .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%?
A. .58%
B. .68%
C. .78%
D. .88%
Answer: D. .88%
To form P*, calculate the weight in P = 21/17 = 1.235
So the weight in the risk-free asset is -.235.
Rp* = (1.235 × 13%) + (-.235 × 5%) = 14.88%
M2 = 14.88 - 14 = .88%
72. 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%?
A. 2.15%
B. 2.76%
C. 2.94%
D. 3.14%
Answer: C. 2.94%
To form P*, calculate the weight in P = 16/19 = .84
So the weight in the risk-free asset is .16.
Rp* = (.84 × 17%) + (.16 × 4%) = 14.94%
M2 = 14.94 - 12 = 2.94%
73. A portfolio generates an annual return of 13%, a beta of .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%?
A. .1143
B. .1233
C. .1354
D. .1477
Answer: A. .1143
Treynor measure = (13% - 5%)/.7 = 11.43%
74. A portfolio generates an annual return of 16%, 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
Treynor measure of the portfolio if the risk-free rate is 6%?
A. .0833
B. .1083
C. .1114
D. .1163
Answer: A. .0833
Treynor measure = (.16 - .06)/1.2 = .0833
75. A portfolio generates an annual return of 13%, a beta of .7, and a standard deviation of
17%. The market index return is 14% and has a standard deviation of 21%. What is the
Sharpe measure of the portfolio if the risk-free rate is 5%?
A. .3978
B. .4158
C. .4563
D. .4706
Answer: D. .4706
Sharpe measure = (.13 - .05)/.17 = .4706
76. A portfolio generates an annual return of 16%, 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
Sharpe ratio of the portfolio if the risk-free rate is 6%?
A. .4757
B. .5263
C. .6842
D. .7252
Answer: B. .5263
Sharpe ratio = (.16 - .06)/.19 = .5263
77. A portfolio generates an annual return of 13%, a beta of .7, and a standard deviation of
17%. The market index return is 14% and has a standard deviation of 21%. What is Jensen's
alpha of the portfolio if the risk-free rate is 5%?
A. .017
B. .034
C. .067
D. .078
Answer: A. .017
Jensen measure = .13 - [.05 + 0.7(.14 - .05)] = .017
78. A portfolio generates an annual return of 16%, 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 Jensen's
alpha of the portfolio if the risk-free rate is 6%?
A. .017
B. .028
C. .036
D. .078
Answer: B. .028
Jensen measure = .16 - [.06 + 1.2(.12 - .06)] = .028
79. The portfolio that contains the benchmark asset allocation against which a manager will
be measured is often called _____________.
A. the bogey portfolio
B. the Vanguard Index
C. Jensen's alpha
D. the Treynor measure
Answer: A. the bogey portfolio
80. An attribution analysis will not likely contain which of the following components?
A. Asset allocation
B. Index returns
C. Risk-free returns
D. Security selection
Answer: C. Risk-free returns
81. Which of the following investment strategies would have produced the highest returns in
the time period since 1926?
A. T-bills portfolio
B. S&P 500 Index fund
C. Perfect market timing
D. Random stock selection
Answer: C. Perfect market timing
82. What phrase might be used as a substitute for the Treynor-Black model developed in
1973?
A. Solely active management
B. Enhanced index approach
C. Passive management
D. Random selection
Answer: B. Enhanced index approach
83. What is the term for the process used to assess portfolio manager performance?
A. Active analysis
B. Attribution analysis
C. Passive analysis
D. Treynor-Black Analysis
Answer: B. Attribution analysis
84. A fund has excess performance of 1.5%. In looking at the fund's investment breakdown,
you see that the fund overweighted equities relative to the benchmark and that the average
return on the fund's equity portfolio was slightly lower than the equity benchmark return. The
excess performance for this fund is probably due to _______________.
A. security selection ability
B. better sector weightings in the equity portfolio
C. the asset allocation decision
D. finding securities with positive alphas
Answer: C. the asset allocation decision
85. For a market timer, the _____________ will be higher when RM is higher.
A. portfolio's alpha and beta
B. portfolio's unsystematic risk
C. portfolio's beta and slope of the characteristic line
D. security selection component of the portfolio
Answer: C. portfolio's beta and slope of the characteristic line
86. The Treynor-Black model combines an actively managed portfolio with an efficiently
diversified portfolio in order to:
I. Improve the diversification of the overall portfolio
II. Improve the overall portfolio's Sharpe ratio
III. Reach a higher CAL than would otherwise be possible
A. I only
B. I and II only
C. II and III only
D. I, II, and III
Answer: C. II and III only
Test Bank for Essentials of Investments
Zvi Bodie, Alex Kane, Alan Marcus
9780078034695, 9789389957877, 9781264140251, 9781260316148, 9780073382401, 9780078034695, 9781260013924, 9780077835422
