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CHAPTER 25EVALUATION OF PORTFOLIO PERFORMANCETRUE/FALSE 1. Investors want their portfolio managers to completely diversify their portfolio, that is, eliminate all systematic risk. ANS: F PTS: 1

2. A peer group comparison collects the returns produced by a representative universe of investors over a specific period of time and displays them in a simple boxplot format. ANS: T PTS: 1

3. The typical proxy for the market portfolio is the S&P 500 Index because it is diversified and price weighted. ANS: F PTS: 1

4. Treynor's performance measure implicitly assumes a completely diversified portfolio. ANS: T PTS: 1

5. A negative Treynor measure (negative T) for a portfolio always indicates that the portfolio would plot below the SML. ANS: F PTS: 1

6. Sharpe's performance assumes that all portfolios are completely diversified. ANS: T PTS: 1

7. The Sharpe measure examines the risk premium per unit of systematic risk. ANS: F PTS: 1

8. The Sharpe and Treynor measures complement each other and thus both should be used to measure portfolio performance. ANS: T PTS: 1

9. The Sharpe and Treynor measures always give different rankings. ANS: F PTS: 1

10. Overall performance is the total return above the risk free rate. ANS: T PTS: 1

This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold, copied, or distributed without the prior consent of the publisher.

11. The Jensen measure requires that each period's rates of return and risk-free rate be measured, rather than using the long-term averages as in the Treynor and Sharpe measures. ANS: T PTS: 1

12. The ranking differences between the Sharpe, Treynor and Jensen performance measures occur because of the differences in diversification. ANS: T PTS: 1

13. Funds with low levels of diversification tend to "beat the market." ANS: F PTS: 1

14. The portfolio performance measure that can be most affected by a benchmark error is the Sharpe measure. ANS: F PTS: 1

15. Attribution analysis separates a portfolio manager's performance into an allocation effect and selection effect. ANS: T PTS: 1

16. An appropriate composite risk measure that indicates the relative price volatility for a bond compared to interest rate changes is the bond's yield to maturity. ANS: F PTS: 1

17. In evaluating bond performance, the Lehman Brothers Index is an appropriate risk measure. ANS: F PTS: 1

18. The policy effect is a difference in bond portfolio performance from that of a benchmark index due to a difference in duration. ANS: T PTS: 1

19. Duration is considered a good measure of risk for a bond portfolio because it indicates the relative volatility of the bond or portfolio due to interest rate changes and also the rating of the bonds. ANS: F PTS: 1

20. A test of bond performance over time indicated that bond portfolio managers are more consistent over time than equity managers. ANS: F PTS: 1

21. A portfolio manager should be evaluated many times and in a variety of market environments before a final judgment is reached regarding his/her strengths and weaknesses. ANS: T PTS: 1

22. Two desirable attributes of a portfolio manager's performance are the ability to derive above-average returns for a given risk class and the ability to time the market. ANS: F PTS: 1

23. The most common manner of evaluating portfolio managers is a peer group comparison. ANS: T PTS: 1

24. Treynor developed the first composite measure of portfolio performance by introducing the capital market line, which defines the relationship between the return of a portfolio over time and the return for the market portfolio. ANS: F PTS: 1

25. The Sharpe measure of portfolio performance divides the portfolio's risk premium by the portfolio's beta. ANS: F PTS: 1

MULTIPLE CHOICE 1. The major requirements of a portfolio manager include the following, except a. Follow the client's policy statement. b. Completely diversify the portfolio to eliminate all unsystematic risk.. c. The ability to derive above-average risk adjusted returns. d. Completely diversify the portfolio to eliminate all systematic risk. e. None of the above (that is, all are requirements of a portfolio manager) ANS: D PTS: 1

2. Portfolio managers who anticipate an increase in interest rates should a. Act to keep the duration constant. b. Decrease the portfolio duration. c. Increase the portfolio duration. d. Assume higher risk in the market. e. Invest in junk bonds. ANS: B PTS: 1

3. Treynor showed that rational, risk averse investors always prefer portfolio possibility lines that have a. Zero slopes.This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold, copied, or distributed without the prior consent of the publisher.

b. Slightly negative slopes. c. Highly negative slopes. d. Slightly positive slopes. e. Highly positive slopes. ANS: E PTS: 1

4. The measure of performance which divides the portfolio's risk premium by the portfolio's beta is the a. Sharpe measure. b. Jensen measure. c. Fama measure. d. Alternative components model (MCV). e. Treynor measure. ANS: E PTS: 1

5. Sharpe's performance measure divides the portfolio's risk premium by the a. Standard deviation of the rate of return. b. Variance of the rate of return. c. Slope of the fund's characteristic line. d. Beta. e. Risk free rate. ANS: A PTS: 1

6. Which measure of portfolio performance allows analysts to determine the statistical significance of abnormal returns? a. Sharpe measure b. Jensen measure c. Fama measure d. Alternative components model (MCV) e. Treynor measure ANS: B PTS: 1

7. Selectivity measures how well a portfolio performed relative to a a. Market portfolio (S&P 400). b. Portfolio of the same securities in the previous period.

c. Naively selected portfolio of equal risk. d. Naively selected portfolio of equal return. e. World market portfolio. ANS: C PTS: 1

8. A portfolio performance measurement technique that decomposes the return of a manager's holdings to a predetermined benchmark's returns and separates the difference into an allocation and selection is called a. Immunization analysis. b. Performance attribution analysis. c. Tactical rankings. d. Convexity utilization. e. Duration matching attrition. ANS: B PTS: 1

9. Under the performance attribution analysis method, the ____ measures the manager's decision to overor underweight a particular market segment in terms of that segment's return performance relative to the overall return to the benchmark. a. Selection effect b. Allocation effect c. Distribution effect d. Diversification effect e. Attribution effect ANS: B PTS: 1

10. Under the performance attribution analysis method, the ____ measures the manager's ability to form specific market segment portfolios that generate superior returns relative to the way in which the comparable market segment is defined in the benchmark portfolio weighted by the manager's actual market segment investment proportions. a. Selection effect b. Allocation effect c. Distribution effect d. Diversification effect e. Attribution effect ANS: A PTS: 1


11. If the return increases as more global investments with low correlation are added to the market portfolio, the efficient frontier moves a. Up and right. b. Up and left. c. Down and right. d. Down and left. e. Up only. ANS: B PTS: 1

12. Wagner and Tito suggested that a bond portfolio return differing from the return from the Lehman Brothers Index can be divided into four components. Which of the following is not included? a. Policy effect b. Rate anticipation effect c. Sector/Quality effect d. Analysis effect e. Trading effect ANS: C PTS: 1

13. Information ratio portfolio performance measures a. Adjust portfolio risk to match benchmark risk. b. Compare portfolio returns to expected returns under CAPM. c. Evaluate portfolio performance on the basis of return per unit of risk. d. Indicate historic average differential return per unit of historic variability of differential return. e. None of the above. ANS: D PTS: 1

14. Relative return portfolio performance measures a. Adjust portfolio risk to match benchmark risk. b. Compare portfolio returns to expected returns under CAPM. c. Evaluate portfolio performance on the basis of return per unit of risk. d. Indicate historic average differential return per unit of historic variability of differential return.

e. None of the above. ANS: C PTS: 1

15. Excess return portfolio performance measures a. Adjust portfolio risk to match benchmark risk. b. Compare portfolio returns to expected returns under CAPM. c. Evaluate portfolio performance on the basis of return per unit of risk. d. Indicate historic average differential return per unit of historic variability of differential return. e. None of the above. ANS: B PTS: 1

16. For a poorly diversified portfolio the appropriate measure of portfolio performance would be a. The Treynor measure because it evaluates portfolio performance on the basis of return and diversification. b. The Sharpe measure because it evaluates portfolio performance on the basis of return and diversification. c. The Treynor measure because it uses standard deviation as the risk measure. d. The Sharpe measure because it uses beta as the risk measure. e. None of the above. ANS: B PTS: 1

17. Components of overall portfolio performance include a. Selectivity. b. Manager's risk. c. Security risk. d. Choices a and b. e. Choices a, b and c. ANS: D PTS: 1

18. A portfolio's gross selectivity is made up of a. Manager's risk. b. Net selectivity. c. Diversification.This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold, copied, or distributed without the prior consent of the publisher.

d. Choices a and b. e. Choices b and c. ANS: E PTS: 1

19. Bailey, Richards, and Tierney maintain that any useful benchmark should have the following characteristics. a. Measurable. b. Investable. c. Value-weighted. d. Choices a and b. e. Choices a, b and c. ANS: D PTS: 1

20. Which of the following statements concerning performance measures is false? a. The Sharpe measure examines both unsystematic and systematic risk. b. The Treynor measure examines systematic risk. c. The Jensen measure examines systematic risk. d. All three measures examine both unsystematic and systematic risk. e. None of the above (that is, all statements are true) ANS: D PTS: 1

21. Which of the following statements about returns-based analysis or effective mix analysis is true? a. This analysis compares the historical return pattern of the portfolio in question with the historical returns of various well-specified indexes. b. This analysis uses sophisticated quadratic programming techniques to indicate what styles or style combinations were most similar to the portfolio's actual historical returns. c. This analysis is based on the belief that the portfolio's current make-up will be a good predictor for the next period's returns. d. Choices a and b e. All of the above statements describe returns-based analysis or effective mix analysis ANS: D PTS: 1

22. A manager's superior returns could have occurred due to: a. an insightful asset allocation strategy, over weighting an asset class that earned high returns.

b. investing in undervalued sectors. c. selecting individual securities that earned above average returns. d. Choices a and c e. All of the above ANS: E PTS: 1

23. In the evaluation of bond portfolio performance, the policy effect refers to a. The difference in portfolio duration and index duration. b. The extra return attributable to acquiring bonds that are temporarily mispriced relative to risk. c. To short-run changes in the portfolio during a specific period. d. The differential return from changing duration of the portfolio during a specific period. e. None of the above. ANS: A PTS: 1

24. In the evaluation of bond portfolio performance, the interest rate anticipation effect refers to a. The difference in portfolio duration and index duration. b. The extra return attributable to acquiring bonds that are temporarily mispriced relative to risk. c. To short-run changes in the portfolio during a specific period. d. The differential return from changing duration of the portfolio during a specific period. e. None of the above ANS: D PTS: 1

25. In the evaluation of bond portfolio performance, the analysis effect refers to a. The difference in portfolio duration and index duration. b. The extra return attributable to acquiring bonds that are temporarily mispriced relative to risk. c. To short-run changes in the portfolio during a specific period. d. The differential return from changing duration of the portfolio during a specific period. e. None of the above ANS: B PTS: 1

26. In the Grinblatt-Titman (GT) performance measure,This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold, copied, or distributed without the prior consent of the publisher.

a. Portfolio performance is measured by assessing the quality of services provided by money managers by looking at adjustments made to the content of their portfolios. b. Portfolio performance is measured by examining both unsystematic and systematic risk. c. Portfolio performance is measured by comparing the returns of each stock in the portfolio to the return of a benchmark portfolio. With the same aggregate investment characteristics as the security in question. d. Portfolio performance is measured on the basis of return per unit of risk. e. Portfolio performance is measured on the basis of historic average differential return per unit of historic variability of differential return. ANS: A PTS: 1

27. In the Characteristic Selectivity (CS) performance measure, a. Portfolio performance is measured by assessing the quality of services provided by money managers by looking at adjustments made to the content of their portfolios. b. Portfolio performance is measured by examining both unsystematic and systematic risk. c. Portfolio performance is measured by comparing the returns of each stock in the portfolio to the return of a benchmark portfolio. With the same aggregate investment characteristics as the security in question. d. Portfolio performance is measured on the basis of return per unit of risk. e. Portfolio performance is measured on the basis of historic average differential return per unit of historic variability of differential return. ANS: C PTS: 1

28. A more recent adjustment to the Sharpe measurement for portfolio evaluation is a. To divide the portfolio risk premium by total risk rather than the portfolio's beta. b. To divide the portfolio risk premium by standard deviation rather than the portfolio's beta. c. To divide the portfolio risk premium by the excess portfolio return rather than total risk. d. To divide the excess portfolio return by the portfolio's standard deviation. e. To divide the excess portfolio return by the portfolio's beta. ANS: C PTS: 1

29. Which portfolio measurement uses the mean excess return in the numerator divided by the amount of residual risk that the investor incurred in pursuit of those excess returns? a. Jensen measure. b. Fama measure. c. Sharpe measure.

d. Treynor ratio. e. Information ratio. ANS: E PTS: 1

30. The cost of active management is the coefficient ER and it is sometimes referred to as a. Market timing. b. Reward for risk. c. Excess reward. d. Excess risk. e. Tracking error. ANS: E PTS: 1

31. A disadvantage of the Treynor and Sharpe measures is that a. They produce absolute performance rankings. b. The beta and standard deviation are static. c. They are both difficult to compute. d. They produce relative performance rankings. e. They give very different measurements for well-diversified portfolios. ANS: D PTS: 1

32. The Sortino measure differs from the Sharpe ratio in that a. It measures the portfolio's average return in excess of a user-selected minimum acceptable return threshold. b. It measures the downside risk in a portfolio. c. Higher values of the Sortino measure are not desirable, while higher values in the Sharpe ratio are desirable. d. Both a and b. e. All of the above. ANS: D PTS: 1

NARRBEGIN: Exhibit 25-01 Exhibit 25-1 USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold, copied, or distributed without the prior consent of the publisher.

The portfolios identified below are being considered for investment. During the period under consideration Rf = .03. Portfolio A B C D NARREND 33. Refer to Exhibit 25-1. Using the Sharpe Measure, which portfolio performed best? a. A b. B c. C d. D e. Two portfolios are tied ANS: B (A) (0.16 0.03) 0.15 = 0.87 Return 0.16 0.22 0.11 0.18 Beta 1.0 1.5 0.6 1.1 0.10 0.08 0.12 0.15

(B)

(0.22 0.03) 0.10 = 1.90

(C)

(0.11 0.03) 0.08 = 1.0

(D)

(0.18 0.03) 0.12 = 1.25

Portfolio B has the best performance using the Sharpe Measure. PTS: 1 OBJ: Multiple Choice Problems NAR: Exhibit 25-01

34. Refer to Exhibit 25-1. According to the Treynor Measure, which portfolio performed best? a. A b. B c. C d. D

e. Two portfolios are tied ANS: D (A) (0.16 0.03) 1.00 = 0.13

(B)

(0.22 0.03) 1.50 = 0.127

(C)

(0.11 0.03) 0.60 = 0.133

(D)

(0.18 0.03) 1.10 = 0.136

Portfolio D has the best performance using the Treynor Measure. PTS: 1 OBJ: Multiple Choice Problems NAR: Exhibit 25-01

NARRBEGIN: Exhibit 25-02 Exhibit 25-2 USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) The portfolios identified below are being considered for investment. Assume that during the period under consideration Rf = .04. Portfolio W X Y Z NARREND 35. Refer to Exhibit 25-2. Using the Sharpe Measure, which portfolio performed best? a. W b. X c. Y d. Z e. Two portfolios are tiedThis edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold, copied, or distributed without the prior consent of the publisher.

Return 0.18 0.21 0.13 0.16

Beta 1.8 0.9 0.7 1.5 0.10 0.03 0.07

0.06

ANS: C (W) (0.18 0.04) 0.06 = 2.33

(X)

(0.21 0.04) 0.10 = 1.70

(Y)

(0.13 0.04) 0.03 = 3.00

(Z)

(0.16 0.04) 0.07 = 1.71

Portfolio Y has the best performance using the Sharpe Measure. PTS: 1 OBJ: Multiple Choice Problems NAR: Exhibit 25-02

36. Refer to Exhibit 25-2. According to the Treynor Measure, which portfolio performed best? a. W b. X c. Y d. Z e. Two portfolios are tied ANS: B (W) (0.18 0.04) 1.8 = 0.078

(X)

(0.21 0.04) 0.9 = 0.189

(Y)

(0.13 0.04) 0.7 = 0.129

(Z)

(0.16 0.04) 1.5 = 0.08

Portfolio X has the best performance using the Treynor Measure. PTS: 1 OBJ: Multiple Choice Problems NAR: Exhibit 25-02

NARRBEGIN: Exhibit 25-03 Exhibit 25-3 USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)

Consider the data presented below on three mutual funds and the market. Standard Fund AAA BBB CCC Market NARREND 37. Refer to Exhibit 25-3. Compute the Sharpe Measure for the AAA fund. a. 4.49 b. 2.74 c. 1.57 d. 1.70 e. 1.27 ANS: C (14 3) 7 = 1.57 PTS: 1 OBJ: Multiple Choice Problems NAR: Exhibit 25-03 Beta 0.75 1.05 0.89 1.00 Deviation (%) 7.0 5.0 8.0 8.0 Return (%) 14 18 20 12 3 3 3 Rf (%) 3

38. Refer to Exhibit 25-3. Compute the Jensen Measure for the BBB fund. a. 4.49 b. 2.74 c. 4.25 d. 5.55 e. 8.99 ANS: D (18 3) [1.05 (12.0 3.0)] = 5.55 PTS: 1 OBJ: Multiple Choice Problems NAR: Exhibit 25-03

39. Refer to Exhibit 25-3. Compute the Treynor Measure for the CCC fund. a. 14.7This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold, copied, or distributed without the prior consent of the publisher.

b. 15.3 c. 19.1 d. 17.0 e. 12.7 ANS: A (20 3) 0.89 = 14.7 PTS: 1 OBJ: Multiple Choice Problems NAR: Exhibit 25-03

NARRBEGIN: Exhibit 25-04 Exhibit 25-4 USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) The data presented below has been collected at this point in time. Standard Fund AAA BBB CCC Market NARREND 40. Refer to Exhibit 25-4. Compute the Sharpe Measure for the AAA fund. a. 2.01 b. 2.74 c. 2.91 d. 5.43 e. 1.72 ANS: A (16 6) 4.98 = 2.01 PTS: 1 OBJ: Multiple Choice Problems NAR: Exhibit 25-04 Beta 1.05 1.00 0.92 1.00 Deviation (%) 4.98 4.04 3.13 3.75 Return (%) 16 15 11 13 6 6 6 Rf (%) 6

41. Refer to Exhibit 25-4. Compute the Jensen Measure for the BBB fund. a. 2.10

b. 2.74 c. 5.43 d. 2.00 e. 1.65 ANS: D (15 6) [1.00 (13.0 6.0)] = 2.00 PTS: 1 OBJ: Multiple Choice Problems NAR: Exhibit 25-04

42. Refer to Exhibit 25-4. Compute the Treynor Measure for the CCC fund. a. 5.43 b. 2.74 c. 2.19 d. 2.00 e. 1.65 ANS: A (11 6) 0.92 = 5.43 PTS: 1 OBJ: Multiple Choice Problems NAR: Exhibit 25-04

NARRBEGIN: Exhibit 25-05 Exhibit 25-5 USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) The data presented below has been collected at this point in time. Standard Fund XXX YYY ZZZ Market NARREND 43. Refer to Exhibit 25-5. Compute the Sharpe Measure for the XXX fund.This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold, copied, or distributed without the prior consent of the publisher.

Beta 1.07 1.02 0.86 1.00

Deviation (%) 5.13 4.28 3.52 3.80

Return (%) 19 17 12 13 6 6 6

Rf (%) 6

a. 6.98 b. 2.35 c. 2.53 d. 3.86 e. 1.72 ANS: C (19 6) 5.13 = 2.53 PTS: 1 OBJ: Multiple Choice Problems NAR: Exhibit 25-05

44. Refer to Exhibit 25-5. Compute the Jensen Measure for the YYY fund. a. 6.98 b. 2.35 c. 2.53 d. 3.86 e. 1.72 ANS: D (17 6) [1.02 (13.0 6.0)] = 3.86 PTS: 1 OBJ: Multiple Choice Problems NAR: Exhibit 25-05

45. Refer to Exhibit 25-5. Compute the Treynor Measure for the ZZZ fund. a. 6.98 b. 2.35 c. 2.53 d. 3.86 e. 1.72 ANS: A (12 6) 0.86 = 6.98 PTS: 1 OBJ: Multiple Choice Problems NAR: Exhibit 25-05

46. What is the Sharpe measure for the S&P 500 over the last ten years if the standard deviation was 8% and the return was 14%? a. 1.55 b. 1.69

c. 1.75 d. 1.99 e. 2.09 ANS: C 14 8 = 1.75 PTS: 1 OBJ: Multiple Choice Problems

NARRBEGIN: Exhibit 25-06 Exhibit 25-6 USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) Given the following information evaluate the performance of Cloud Incorporated (CI). RCI = 0.17 NARREND 47. Refer to Exhibit 25-6. Calculate CI's overall performance. a. 0.1225 b. 0.1000 c. 0.0525 d. 0.0475 e. 0.0325 ANS: B Overall Performance = RCI Rf = 0.17 0.07 = 0.10 PTS: 1 OBJ: Multiple Choice Problems NAR: Exhibit 25-06 BCI = 1.05 Rf = 0.07 Rm = 0.12

48. Refer to Exhibit 25-6. Calculate CI's selectivity. a. 0.1225 b. 0.1000 c. 0.0525 d. 0.0475 e. 0.0325 ANS: D Selectivity = RCI Rx(Ba)This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold, copied, or distributed without the prior consent of the publisher.

where Rx(Ba) = Rf + BCI(Rm Rf) = 0.07 + 1.05(0.12 0.07) = 0.1225 Selectivity = 0.17 0.1225 = 0.0475 PTS: 1 OBJ: Multiple Choice Problems NAR: Exhibit 25-06

49. Refer to Exhibit 25-6. Calculate CI's risk. a. 0.1225 b. 0.1000 c. 0.0525 d. 0.0475 e. 0.0325 ANS: C Risk = Rx(Ba) Rf = 0.1225 0.07 = 0.0525 PTS: 1 OBJ: Multiple Choice Problems NAR: Exhibit 25-06

NARRBEGIN: Exhibit 25-07 Exhibit 25-7 USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) Given the following information evaluate the performance of Tyler Incorporated (TI). RTI = 0.18 NARREND 50. Refer to Exhibit 25-7. Calculate TI's overall performance. a. 0.0113 b. 0.1200 c. 0.0670 d. 0.0530 e. 0.0696 ANS: B Overall Performance = RTI Rf = 0.18 0.06 = 0.12 PTS: 1 OBJ: Multiple Choice Problems NAR: Exhibit 25-07 BTI = 1.06 Rf = 0.06 Rm = 0.11

51. Refer to Exhibit 25-7. Calculate TI's selectivity. a. 0.0113 b. 0.1200

c. 0.0687 d. 0.0530 e. 0.0696 ANS: C Selectivity = RTI Rx(Ba) where Rx(Ba) = Rf + BTI(Rm Rf) = 0.06 + 1.06(0.11 0.06) = 0.113 Selectivity = 0.18 0.113 = 0.0687 PTS: 1 OBJ: Multiple Choice Problems NAR: Exhibit 25-07

52. Refer to Exhibit 25-7. Calculate TI's risk. a. 0.0113 b. 0.1200 c. 0.0670 d. 0.0530 e. 0.0696 ANS: D Risk = Rx(Ba) Rf = 0.113 0.06 = 0.053 PTS: 1 OBJ: Multiple Choice Problems NAR: Exhibit 25-07

NARRBEGIN: Exhibit 25-08 Exhibit 25-8 USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) Weights Policy 50% stocks 50% bonds Actual 60% stocks 40% bonds

Returns Index 8% stocks 5% bonds Actual 9% stocks 7% bonds


NARREND 53. Refer to Exhibit 25-8. Which of the following statements is true? a. The portfolio manager earned an extra 0.3% because of a shift in allocation out of bonds and into stocks. b. The portfolio manager earned an extra 0.3% because of a shift in allocation out of stocks and into bonds. c. The portfolio manager earned an extra 6.5% because of a shift in allocation out of bonds and into stocks. d. The portfolio manager earned an extra 6.5% because of a shift in allocation out of stocks and into bonds. e. None of the above is a true statement. ANS: A Policy allocation, index return = (.50)(8%) + (.50)(5%) = 6.5% Actual allocation, index return = (.60)(8%) + (.40)(5%) = 6.8% The manager earned an extra 0.3% because of a shift in allocation during a time period when equity market outperformed bond market. PTS: 1 OBJ: Multiple Choice Problems NAR: Exhibit 25-08

54. Refer to Exhibit 25-8. Which of the following statements is true? a. Sector/security selection hurt the portfolio performance; returns were 1.4% less than if the manager invested the funds in stocks and bond indexes. b. Sector/security selection improved the portfolio performance by 1.4%; each sector return was higher than for index value. c. Sector/security selection hurt the portfolio performance; returns were 6.8% less than if the manager invested the funds in stocks and bond indexes. d. Sector/security selection improved the portfolio performance by 6.8%; each sector return was higher than for index return. e. None of the above is a true statement. ANS: B Actual allocation, actual return = (.60)(9%) + (.40)(7%) = 8.2% Actual allocation, index return = (.60)(8%) + (.40)(5%) = 6.8% Sector/security selection improved the portfolio's performance by 1.4%; each sector return was higher than for index value. Overall, the manager made a good allocation decision (which increased return by 0.3%) and a good sector/security selection (which increased returns by 1.4%). PTS: 1 OBJ: Multiple Choice Problems NAR: Exhibit 25-08

NARRBEGIN: Exhibit 25-09 Exhibit 25-9 THE FOLLOWING INFORMATION IS FOR THE NEXT PROBLEM(S) Consider the following information for four portfolios, the market and the risk free rate (RFR) Portfolio A1 A2 A3 A4 Market RFR NARREND 55. Refer to Exhibit 25-9. Calculate the Sharpe Measure for each portfolio a. A1 = 0.40, A2 = 0.31, A3 = 0.65, A4 = 0.66 b. A1 = 0.31, A2 = 0.66, A3 = 0.65, A4 = 0.40 c. A1 = 0.66, A2 = 0.65, A3 = 0.31, A4 = 0.40 d. A1 = 0.66, A2 = 0.31, A3 = 0.65, A4 = 0.40 e. None of the above ANS: D Portfolio A1 A2 A3 A4 Market RFR PTS: 1 Return 0.15 0.1 0.12 0.08 0.11 0.03 Beta 1.25 0.9 1.1 0.8 1 0 SD 0.182 0.223 0.138 0.125 0.2 0 NAR: Exhibit 25-09 Sharpe 0.66 0.31 0.65 0.4 0.4 Rank 1 4 2 3 Treynor 0.096 0.077778 0.081818 0.0625 0.08 Rank 1 3 2 4 Jensen a 0.02 0.002 0.002 0.014 0 Rank 1 3 2 4 Return 0.15 0.1 0.12 0.08 0.11 0.03 Beta 1.25 0.9 1.1 0.8 1 0 SD 0.182 0.223 0.138 0.125 0.2 0

OBJ: Multiple Choice Problems

56. Refer to Exhibit 25-9. Calculate the Jensen alpha Measure for each portfolioThis edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold, copied, or distributed without the prior consent of the publisher.

a. A1 = 0.014, A2 = 0.002, A3 = 0.002, A4 = 0.02 b. A1 = 0.002, A2 = 0.02, A3 = 0.002, A4 = 0.014 c. A1 = 0.02, A2 = 0.002, A3 = 0.002, A4 = 0.014 d. A1 = 0.02, A2 = 0.002, A3 = 0.02, A4 = 0.14 e. None of the above ANS: C Portfolio A1 A2 A3 A4 Market RFR PTS: 1 Return 0.15 0.1 0.12 0.08 0.11 0.03 Beta 1.25 0.9 1.1 0.8 1 0 SD 0.182 0.223 0.138 0.125 0.2 0 NAR: Exhibit 25-09 Sharpe 0.66 0.31 0.65 0.4 0.4 Rank 1 4 2 3 Treynor 0.096 0.077778 0.081818 0.0625 0.08 Rank 1 3 2 4 Jensen a 0.02 0.002 0.002 0.014 0 Rank 1 3 2 4


57. Refer to Exhibit 25-9. Calculate the Treynor Measure for each portfolio a. A1 = 0.0625, A2 = 0.0778, A3 = 0.0818, A4 = 0.096 b. A1 = 0.096, A2 = 0.0778, A3 = 0.0818, A4 = 0.0625 c. A1 = 0.096, A2 = 0.0818, A3 = 0.0778, A4 = 0.0625 d. A1 = 0.0778, A2 = 0.096, A3 = 0.0818, A4 = 0.0625 e. None of the above ANS: B Portfolio A1 A2 A3 A4 Market RFR PTS: 1 Return 0.15 0.1 0.12 0.08 0.11 0.03 Beta 1.25 0.9 1.1 0.8 1 0 SD 0.182 0.223 0.138 0.125 0.2 0 NAR: Exhibit 25-09 Sharpe 0.66 0.31 0.65 0.4 0.4 Rank 1 4 2 3 Treynor 0.096 0.077778 0.081818 0.0625 0.08 Rank 1 3 2 4 Jensen a 0.02 0.002 0.002 0.014 0 Rank 1 3 2 4


NARRBEGIN: Exhibit 25-10 Exhibit 25-10 THE FOLLOWING INFORMATION IS FOR THE NEXT PROBLEM(S) Consider the following information for a portfolio manager Policy Weight Stocks Bonds Cash NARREND 58. Refer to Exhibit 25-10. Calculate the percentage return that can be attributed to the asset allocation decision. a. 0.105% b. 0.925% c. 0.20% d. 0.96% e. 0.94% ANS: C Policy Weight Stocks Bonds Cash 0.65 0.3 0.05 Actual Weight 0.7 0.25 0.05 Index Returns 0.11 0.07 0.03 Actual Returns 0.12 0.08 0.025 0.65 0.3 0.05 Actual Weight 0.7 0.25 0.05 Index Returns 0.11 0.07 0.03 Actual Returns 0.12 0.08 0.025

Asset Allocation Policy x index Actual x index 0.094 0.096 0.002This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold, copied, or distributed without the prior consent of the publisher.

Security Selection Actual x Actual Actual x index 0.10525 0.096 0.00925 PTS: 1 OBJ: Multiple Choice Problems NAR: Exhibit 25-10

59. Refer to Exhibit 25-10. Calculate the percentage return that can be attributed to the security selection decision. a. 0.105% b. 0.925% c. 0.20% d. 0.96% e. 0.94% ANS: B Policy Weight Stocks Bonds Cash 0.65 0.3 0.05 Actual Weight 0.7 0.25 0.05 Index Returns 0.11 0.07 0.03 Actual Returns 0.12 0.08 0.025

Asset Allocation Policy x index Actual x index 0.094 0.096 0.002

Security Selection Actual x Actual Actual x index 0.10525 0.096 0.00925

PTS: 1


NAR: Exhibit 25-10

60. A portfolio manager has the following sequence of cash flows over a two year period. Time outflows inflows 0 $2,000 1 $500 $50 2

$3,090

Calculate the portfolio manager's dollar weighted return. a. 13.56% b. 11.48% c. 15.50% d. 8.75% e. 10.67% ANS: A Time outflows inflows 0 $2,000 1 $500 $50 2

$90 $3,000

Net

$2,000

$450

$3,090

Dollar weighted return

13.56%

To calculate dollar weighted return solve for r in the following equation

PTS: 1


61. A portfolio manager has the following sequence of cash flows over a two year period. Market Value before Time 0 cash flow $0 Cash In $3,000 Market Value after cash flow $3,000


1 2

$3,200 $6,000

$1,950 $90

$5,150 $5,910

Calculate the portfolio manager's time weighted return. a. 13.56% b. 11.48% c. 15.50% d. 8.75% e. 10.67% ANS: B MV before Time 0 1 2 cash flow $0 $3,200 $6,000 Cash In $3,000 $1,950 $90 MV after Cash flow $3,000 $5,150 $5,910 6.67% 16.50% Return

Time weighted return

11.48%

Period 1 return = 1 (3200/3000) = 0.0667 Period 2 return = 1 (6000/5150) = .165 Time weighted return = [(1 + 0.0667)(1 + 0.165)]0.5 1 = 0.1148 PTS: 1 OBJ: Multiple Choice Problems

NARRBEGIN: Exhibit 25-11 Exhibit 25-11 USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) The last year's performance for four mutual funds is presented below. The market return was 10.70%, last year with a standard deviation of 13.1% and the risk-free rate of return was 5%. Standard Fund A Beta 1.50 Deviation (%) 18.95 Return (%) 12.5

B C D NARREND

1.20 0.90 0.50

12.41 9.30 8.10

13.0 11.2 9.5

62. Refer to Exhibit 25-11. Compute the Sharpe Measure for the A fund. a. 0.012 b. 0.040 c. 0.069 d. 0.396 e. 1.142 ANS: D Sharpe for A: (.125 .05) .1895 = 0.396 PTS: 1 OBJ: Multiple Choice Problems NAR: Exhibit 25-11

63. Refer to Exhibit 25-11. Compute the Jensen Measure for the B fund. a. 1.16% b. 2.31% c. 6.90% d. 9.60% e. 10.13% ANS: A Jensen for B: (.13 .05) [1.20 (.107 .05)] = .08 .0684 = .0116 PTS: 1 OBJ: Multiple Choice Problems NAR: Exhibit 25-11

64. Refer to Exhibit 25-11. Compute the Treynor Measure for the C fund. a. 0.012 b. 0.040 c. 0.069 d. 0.396 e. 1.142 ANS: CThis edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold, copied, or distributed without the prior consent of the publisher.

Treynor for C: (.112 .05) 0.90 = .0688 PTS: 1 OBJ: Multiple Choice Problems NAR: Exhibit 25-11

65. Refer to Exhibit 25-11. Based on the Sharpe Measure, which portfolio preformed best? a. A b. B c. C d. D e. Market ANS: C Sharpe for A: (.125 .05) .1895 = 0.396 Sharpe for B: (.130 .05) .1241 = 0.645 Sharpe for C: (.112 .05) .0930 = 0.667 Sharpe for D: (.095 .05) .0810 = 0.556 Sharpe for Market: (.107 .05) .131 = 0.435 PTS: 1 OBJ: Multiple Choice Problems NAR: Exhibit 25-11

66. Refer to Exhibit 25-11. Based on the Treynor Measure, which portfolio preformed best? a. A b. B c. C d. D e. Market ANS: D Treynor for A: (.125 .05) 1.5 = 0.050 Treynor for B: (.130 .05) 1.2 = 0.067 Treynor for C: (.112 .05) 0.9 = 0.069 Treynor for D: (.095 .05) 0.5 = 0.090 Treynor for Market: (.107 .05) 1.0 = 0.057 PTS: 1 OBJ: Multiple Choice Problems NAR: Exhibit 25-11

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