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21
18) A portfolio has a total return of 14.4%, a standard deviation of 18.5% and a beta of 1.43.
The risk free rate is 2.5%, the market rate of return is 11.4%, and the market's Treynor measure
is 6.3. What is the value of the Treynor measure of this portfolio?
A) -1.9%
B) .63 %
C) 8.32%
D) 27.4%
AACSB: 3 Analytical thinking
Question Status: New Question
Learning Goal: Learning Goal 4
19) Treynor's measure of portfolio performance focuses on
A) nondiversifiable risk.
B) diversifiable risk.
C) total risk.
D) the standard deviation of the portfolio.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
20) A portfolio has a total return of 10.5%, a beta of 0.72 and a standard deviation of 6.3%. The
risk free rate is 3.8%, the market return is 12.4%. Jensen's measure of this portfolio's
performance is
A) 0.5%.
B) 4.3%.
C) 7.9%.
D) 9.3%.
AACSB: 3 Analytical thinking
Question Status: New Question
Learning Goal: Learning Goal 4
21) Which of the following is a "higher the better" measure?
A) only Sharpe's measure
B) only Treynor's measure
C) only Jensen's measure
D) All three are "higher the better" measures.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
22
22) Which one of the following statements is correct if a portfolio has a Jensen measure of
return of zero?
A) The portfolio has a total return of zero percent.
B) The portfolio earned exactly its expected return on a risk-adjusted basis.
C) The portfolio outperformed the market on a risk-adjusted basis.
D) The market provides a better return on a risk-adjusted basis.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
23) Allison's portfolio has an expected return of 14% and a beta of 1.37. Brianna's portfolio
has an expected rate of return of 11% and a beta of 1. The risk-free rate is 3% and the expected
rate of return on the market is 12%. According to the Jensen's measure,
A) Allison has the better portfolio.
B) Brianna has the better portfolio.
C) the portfolios are equally desirable.
D) the answer depends on Allison and Brianna's risk tolerance.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
24) Which of the following statements about Jensen's measure are correct?
I. Through its use of the capital asset pricing model, Jensen's measure automatically adjusts
for market return.
II. In general, the higher the Jensen's measure, the better a portfolio has performed.
III. Jensen's measure is referred to as alpha.
IV. A positive Jensen's measure indicates an investment has underperformed the market on a
risk-adjusted basis.
A) I and IV only
B) I, II and III only
C) II and III only
D) I, III and IV only
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
23
25) The process of selling certain issues in a portfolio and purchasing new ones to replace them
is known as
A) portfolio revision.
B) market timing.
C) red herring baiting.
D) dollar cost averaging.
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
26) One year ago, Matt bought 100 shares of ACE Corp. stock for $5,619 including
commission. He is about to sell the ACE stock for $6,528 net of commissions. When he made
the purchase the S&P 500 index was at 907; now it is 1070. The beta of ACE stock is 0.98, and
the market's risk-free rate is 4.0%. No dividends were paid. Based on Jensen's measure, did
Matt make a good purchase?
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
27) The Witney Growth Fund, a no-load mutual fund, had a net asset value per share of $54.28
one year ago. Its current net asset value is $56.93. During the year it paid out dividends and
capital gains of $2.08 per share. It has a beta value of 1.75. Over the same period the market
return was 6.4% and the risk-free rate of return was 3.5%.
(a) Calculate Treynor's measure for the Witney Growth Fund. (Show all work.)
(b) Based on Treynor's measure, how did the fund perform in relation to the overall market?
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
24
28) Explain the type of risk measured by each of the following measures. Also identify the
factor in each formula that determines the type of risk that is being measured.
(a) Jensen's measure
(b) Sharpe's measure
(c) Treynor's measure
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 4
13.5 Learning Goal 5
1) Formula plans are high-risk investment strategies that attempt to benefit from cyclical price
movements.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 5
2) Dollar cost averaging is a formula plan to purchase the same number of shares of stock at
regular intervals of time.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 5
3) Dollar cost averaging is a formula plan which automatically causes investors to purchase
more shares when the price is low and purchase fewer shares when the price is high.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 5
25
4) Successful portfolio management with a variable ratio plan depends on the investor's skill in
timing the market.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: New Question
Learning Goal: Learning Goal 5
5) Investors who use formula plans believe that they have above average ability to time the
market and pick successful investments.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 5
6) A constant-ratio plan requires an investor to periodically rebalance the portfolio.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 5
7) A constant ratio plan allows for speculative gains while limiting potential losses.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 5
8) Which one of the following statements concerning formula plans is correct?
A) The use of subjective judgment is important to the routine administration of most formula
plans.
B) Formula plans are based on the adherence to a mechanical set of rules with regard to when
to buy and/or sell.
C) The objective of most formula plans is to maximize profits.
D) Securities with very stable prices are best suited to nearly all formula plans.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 5
26
9) Dollar cost averaging is a procedure by which an investor
A) buys more stock as its price increases.
B) times investments in order to buy low and sell high.
C) invests a fixed dollar amount in a security at fixed intervals.
D) maintains a constant ratio of conservative and aggressive investments.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 5
10) Which one of the following statements is correct concerning dollar cost averaging plans?
A) Dollar cost averaging is an active trading strategy.
B) Dollar cost averaging is a short-term trading strategy.
C) The goal of dollar cost averaging is current dividend income.
D) The goal of dollar cost averaging is long-term capital appreciation.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 5
11) The general theory of dollar cost averaging is
A) to time the market to take advantage of low stock prices.
B) to buy more stock when prices are low and less when prices are high.
C) to equal the performance of market averages at the lowest dollar cost.
D) to sell as markets decline and buy as they begin to rise.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 5
12) Dollar cost averaging is likely to work best with a mutual fund
A) whose NAV fluctuates widely, but trends upward.
B) whose NAV remains relatively constant, like a money market fund.
C) whose NAV fluctuates widely, but trends downward.
D) whose NAV fluctuates within a narrow range and is relatively trendless.
AACSB: 3 Analytical thinking
Question Status: New Question
Learning Goal: Learning Goal 5
27
13) The formula plan that requires maintaining a target dollar investment in the speculative
portion of an investor's portfolio is the
A) most passive of all the formula plans.
B) target return plan.
C) constant ratio plan.
D) constant dollar plan.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 5
14) If a constant-dollar plan portfolio is profitable over the long run, the ________ in value
over time.
A) conservative portion will increase
B) conservative portion will remain constant
C) aggressive portion will decrease
D) entire portfolio will remain constant
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 5
15) The constant-ratio plan
A) requires the establishment of trigger points for portfolio rebalancing.
B) utilizes a predetermined ratio between desired current yield and expected capital gains.
C) strictly adheres to a buy-and-hold strategy.
D) is an attempt to time the cyclical movements of the market.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 5
28
16) The formula plan which requires the greatest management attention and is also the most
aggressive is called the ________ plan.
A) dollar cost averaging
B) constant dollar
C) constant ratio
D) variable ratio
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 5
17) The theory behind the variable ratio plan is to
A) passively buy and hold a wide variety of securities.
B) time the cyclical movements of the stock market and thereby "buy low and sell high."
C) avoid selling any security for a capital gain, and thus indefinitely avoiding the capital gains
tax.
D) keep the unit cost of the portfolio at a constant level.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 5
18) Investors who who accept the random walk theory should use
A) a dollar cost averaging plan.
B) a constant dollar plan.
C) a constant ratio plan.
D) a variable ratio plan.
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 5
