FIN 510 CHPT 24

True or false: Efficient allocation depends on the quality of financial professionals and the ability of financial markets to identify and direct capital to the best stewards.

True

The ____________ __________ is the constant annual return over the 20 years that would provide the same total cumulative return over the entire investment period.

geometric average

Suppose you invested $2,000 in a mutual fund two years ago, added $1,000 a year later, and redeemed all your shares today. If the fund returns for the first and the second year were 10% and 8% respectively, the dollar-weighted average return on your inves

less than the time-weighted average return
note:
Reason:
You have more money invested during the second year when the return is lower.

Select all that apply
Which statements are true about the use of comparison universes to evaluate managers?
Dollar-weighted average returns are used to rank the funds.
A 90th percentile manager has performed better than 10% of competing funds over the eva

It can be misleading because managers' levels of risk may vary.
It can be misleading when managers focus on different assets within an asset class.
note:
1. Reason:
It is usually time-weighted returns.
2. Reason:
A 90th percentile manager has performed be

Select all that apply
Consider the following data. Portfolio P has average return of 28%, beta of 2, and standard deviation of 16%. The market has average return of 14%, beta of 1, and standard deviation of 4%. If the risk-free rate is 4%, for which measu

Jensen's alpha
Treynor measure
note:
1. Reason:
Portfolio P is 4% and market is zero by definition.
2. Reason:
Portfolio P is 12% and market is 10%.
3. Reason:
Market is 2.5, and Portfolio P is 1.5.

Select all that apply
Evaluating the performance of a fund manager presents which difficulties?
The manager may use fundamental analysis.
Average portfolio return is not straightforward to measure.
The manager may use technical analysis.
The proper measur

Average portfolio return is not straightforward to measure.
The proper measure of risk may not be obvious.
Risk levels may change along with portfolio composition.

Since each return has an equal weight in the geometric average, it is also called the _____________-___________ average return.

Time weighted

The benchmark for acceptable performance is the ________________ ______________ of the market index because the investor can easily opt for a passive strategy by investing in an indexed equity mutual fund.

Sharpe Ratio

The dollar-weighted average return on an investment is ______.
less than or equal to the time-weighted average return
the rate of return that mutual funds include in their annual reports
greater than the time-weighted average return
the discount rate that

the discount rate that makes the net present value of the investment equal to zero

The collection of money managers of similar investment style used for assessing relative performance of a portfolio manager is the ____________ ___________.

Comparison Universe

Match the portfolio performance measure with its description.
1. Sharpe ratio
2. Treynor measure
3. Jensen's alpha
4. Information ratio
A. Average excess return divided by standard deviation of excess returns
B. Alpha divided by the nonsystematic risk of

1. A
2. D
3. C
4. B
Sharpe ratio
<->
Average excess return divided by standard deviation of excess returns
Treynor measure
<->
Average excess return divided by systemic risk (?)
Jensen's alpha
<->
Average return above the CAPM prediction given the portfol

For an investor with preferences defined by U = E(rP) ? � A ?p^2, the optimal entire risky portfolio maximizes which measure?
Jensen's alpha
Sharpe ratio
Treynor measure
Information ratio

Sharpe ratio

An equivalent representation of Sharpe's ratio, proposed by Graham and Harvey, and later popularized by Leah Modigliani is dubbed the ________________ measure.

M^2 or Modigliani -squared

A portfolio that has a higher Treynor measure than the market will have a T-line with a larger ______ than the ______ Market Line
intercept; Security
intercept; Capital
slope; Security
slope; Capital

slope; Security

True or false: Even moderate levels of statistical noise make performance evaluation extremely difficult in practice.

True
note:
With statistical noise, a long sample relative to a manager's career is needed to test for outperformance.

When we compare a fund with its benchmark index, the interpretation becomes more intuitive if we use M2 rather than the Sharpe ratio because ______.
M2 uses excess return instead of average return
it shows the difference in variance when portfolio return

it shows the difference in return when portfolio variance is the same as market variance

What is the appropriate performance metric when evaluating potential components of the full risky portfolio?
Sharpe ratio
Information ratio
Treynor measure
Jensen's alpha

Treynor measure

The systematic measurement of the exposures of managed portfolios by the regression of fund returns on indexes representing a range of asset classes is referred to as ____________ _____________.

Style Analysis

When we evaluate the performance of a fund manager, the historical average return would be invalid as a performance measure because ______.
it does not adjust for risk
higher-risk investments underperform lower risk ones in bull markets
higher-risk invest

it does not adjust for risk

True or false: Style analysis has become a very popular in the investment management industry and has spawned quite a few variations on Sharpe's methodology.

True

As mutual funds are barred from short positions, the regression coefficients of a style analysis are constrained to be ________.
positive
greater than 1
either zero or positive
greater than or equal to 1

either zero or positive

The active strategy with shifting means appears _____ than it really is and ____ the estimate of the Sharpe measure downward.
smoother; pulls
riskier; biases
smoother; biases
riskier; pushes

riskier; biases

Which statements are true of style analysis and which are true of evaluation based on the SML of the CAPM.
1. Is a better representation of performance relative to the theoretically-prescribed passive portfolio
2. Uses multiple asset classes for compariso

1. D
2. A
3. B
4. C
Is a better representation of performance relative to the theoretically-prescribed passive portfolio
matches
Choice, SML
SML
Uses multiple asset classes for comparison
matches
Choice, Style Analysis
Style Analysis
Reveals the strategy

The only manipulation-proof performance measure is ______.
the Morningstar risk-adjusted return
the Sharpe ratio
alpha based on the Fama-French model
the information ratio

the Morningstar risk-adjusted return

The systematic measurement of the exposures of managed portfolios by the regression of fund returns on indexes representing a range of asset classes is referred to as _______________ ________________.

Style analysis

_______________ _______________ involves shifting funds between a market-index portfolio and a safe asset, depending on whether the index is expected to outperform the safe asset.

Market Timing

An active strategy interferes with portfolio evaluation by making the portfolio apparently ______ volatile and ______ the estimate of the Sharpe ratio.
less; raising
more; raising
more; lowering
less; lowering

more; lowering

If you were a perfect market timer, ______.
you would prefer an investment with a low standard deviation
your return would be truly risk-free
you should avoid an investment with a large standard deviation
it would be possible for you to have a return lowe

your return would be truly risk-free

The _______________ ________________-_______________ _____________ can be interpreted as the risk-free equivalent excess return of the portfolio for an investor with risk aversion measured by ?.

Blank 1: Morningstar
Blank 2: Risk
Blank 3: Adjusted
Blank 4: Rating

Perfect market timing is equivalent to holding ______.
a well-diversified portfolio
a free call option on the market index
a portfolio that has a negative beta
a market index and the risk-free asset

a free call option on the market index

Select all that apply
Which statements are correct about market timing?
Market timers shift beta and mean return, moving into and out of the market.
Previous research shows significant evidence of market timing ability in mutual funds.
Market timers shift

Market timing ability can be tested by adding a squared term to the usual linear index model.
Market timers shift beta based on their expectation of the performance of the market index.
Market timers shift beta and mean return, moving into and out of the

The ____________ skew of the timer's distribution is a manifestation of the fact that the extreme values are all positive.

positive

Placing a value on perfect timing enables us to assign value to ______________-____________-_____________ timers.

less
than
perfect

The value of an imperfect timer is the value of the perfect-timing call option ______ the measure of timing ability.
plus
minus
divided by
times

times

Suppose we are attributing performance of a managed portfolio to asset allocation, sector selection, and security selection. If the portfolio outperforms the bogey by sector selection, it ______.
overweights well-performing sectors and underweights poorly

overweights well-performing sectors and underweights poorly performing sectors

Select all that apply
Which statements are correct about a manager's performance as depicted in the figure? (Click to enlarge.)
The bogey has a higher return in the asset class than the manager.
The manager would have a higher return from the asset class

The manager would have a higher return from the asset class than the bogey in the absence of security selection.
The manager's return from the asset class is rPiwPi.
notes:
1. Reason:
The manager's return in the asset class rPi is higher than the bogey's

If P1 is the proportion of the correct forecasts of bull markets and P2 is the proportion for bear markets, then what is the correct measure of timing ability?
(P1+P2?1)/2
P1 + P2
(P1+P2)/2
P1 + P2 ? 1

P1 + P2 ? 1

The performance attribution procedure explains the difference in returns between a managed portfolio and a selected benchmark portfolio which is called the _______________.

bogey

The contribution of an asset class is the contribution from asset allocation given by ______ plus the contribution from security selection given by ______.
Weight in asset class � Benchmark return; Excess weight in asset class � Excess return
Excess weigh

Excess weight in asset class � Benchmark return; Weight in asset class � Excess return

When we construct the bogey to attribute performance of a managed portfolio, the weights of assets in the bogey depend on ______.
the implied volatility of S&P 500 index
the risk-free rate
the risk premium on the market portfolio
the risk tolerance of the

the risk tolerance of the investor

When we attribute the performance of a managed portfolio, the contribution of asset allocation to superior performance equals the sum over all markets of the excess weight in each market times ________.
the excess return on the bogey
the risk tolerance of

the return of the market index

Select all that apply
Which three of the following are components of performance commonly used in performance attribution?
The level of Jensen's alpha achieved
Broad asset market allocation choices across equity, fixed-income, and money markets
Security c

Broad asset market allocation choices across equity, fixed-income, and money markets
Security choice within each sector
Industry (sector) choice within each market
notes:
1. Reason:
Alpha is used for performance evaluation, not performance attribution.