Essentials of Investments, 11e (Bodie)
Chapter 18 Evaluating Investment Performance
1) Hedge funds
I. are appropriate as a sole investment vehicle for an investor.
II. should only be added to an already well-diversified portfolio.
III. pose performance-evaluation issues due to nonlinear factor exposures.
IV. have down-market betas that are typically larger than up-market betas.
V. have symmetrical betas.
A) I only
B) II and V
C) I, III, and IV
D) II, III, and IV
E) I, III, and V
2) Mutual funds show ________ evidence of serial correlation, and hedge funds show ________
evidence of serial correlation.
A) almost no; almost no
B) almost no; substantial
C) substantial; substantial
D) substantial; almost no
E) modest; modest
3) The comparison universe is
A) a concept found only in astronomy.
B) the set of all mutual funds in the world.
C) the set of all mutual funds in the U.S.
D) a set of mutual funds with similar risk characteristics to your mutual fund.
E) None of the options are correct.
4) The comparison universe is not
A) a concept found only in astronomy.
B) the set of all mutual funds in the world.
C) the set of all mutual funds in the U.S.
D) a set of mutual funds with similar risk characteristics to your mutual fund.
E) a concept found only in astronomy, the set of all mutual funds in the world, or the set of all
mutual funds in the U.S.
5) ________ did not develop a popular method for risk-adjusted performance evaluation of
mutual funds.
A) Eugene Fama
B) Michael Jensen
C) William Sharpe
D) Jack Treynor
E) Eugene Fama and Michael Jensen
6) ________ developed a popular method for risk-adjusted performance evaluation of mutual
funds.
A) Eugene Fama
B) Michael Jensen
C) William Sharpe
D) Jack Treynor
E) Michael Jensen, William Sharpe, and Jack Treynor
7) Henriksson (1984) found that, on average, betas of funds ________ during market advances.
A) increased very significantly
B) increased slightly
C) decreased slightly
D) decreased very significantly
E) did not change
8) Most professionally managed equity funds generally
A) outperform the S&P 500 Index on both raw and risk-adjusted return measures.
B) underperform the S&P 500 Index on both raw and risk-adjusted return measures.
C) outperform the S&P 500 Index on raw return measures and underperform the S&P 500 Index
on risk-adjusted return measures.
D) underperform the S&P 500 Index on raw return measures and outperform the S&P 500 Index
on risk-adjusted return measures.
E) match the performance of the S&P 500 Index on both raw and risk-adjusted return measures.
9) Suppose two portfolios have the same average return and the same standard deviation of
returns, but portfolio A has a higher beta than portfolio B. According to the Sharpe measure, 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 as there are no data on the alpha of the portfolio.
E) None of the options are correct.
10) Suppose two portfolios have the same average return and the same standard deviation of
returns, but portfolio A has a higher beta than portfolio B. According to the Treynor measure, 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 as there are no data on the alpha of the portfolio.
E) None of the options are correct.
11) Suppose two portfolios have the same average return and the same standard deviation of
returns, but portfolio A has a lower beta than portfolio B. According to the Treynor measure, 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 as there are no data on the alpha of the portfolio.
E) None of the options are correct.
12) 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 Sharpe measure,
the performance of Aggie Fund
A) is better than the performance of Raider Fund.
B) is the same as the performance of Raider Fund.
C) is poorer than the performance of Raider Fund.
D) cannot be measured as there are no data on the alpha of the portfolio.
E) None of the options
13) 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
A) is better than the performance of Raider Fund.
B) is the same as the performance of Raider Fund.
C) is poorer than the performance of Raider Fund.
D) cannot be measured as there are no data on the alpha of the portfolio.
14) Suppose two portfolios have the same average return and the same standard deviation of
returns, but Aggie Fund has a lower beta than Raider Fund. According to the Treynor measure,
the performance of Aggie Fund
A) is better than the performance of Raider Fund.
B) is the same as the performance of Raider Fund.
C) is poorer than the performance of Raider Fund.
D) cannot be measured as there are no data on the alpha of the portfolio.
15) Suppose two portfolios have the same average return and the same standard deviation of
returns, but Buckeye Fund has a higher beta than Husker Fund. According to the Sharpe
measure, the performance of Buckeye Fund
A) is better than the performance of Husker Fund.
B) is the same as the performance of Husker Fund.
C) is poorer than the performance of Husker Fund.
D) cannot be measured as there are no data on the alpha of the portfolio.
16) Suppose two portfolios have the same average return and the same standard deviation of
returns, but Buckeye Fund has a lower beta than Husker Fund. According to the Sharpe measure,
the performance of Buckeye Fund
A) is better than the performance of Husker Fund.
B) is the same as the performance of Husker Fund.
C) is poorer than the performance of Husker Fund.
D) cannot be measured as there are no data on the alpha of the portfolio.
17) Suppose two portfolios have the same average return and the same standard deviation of
returns, but Buckeye Fund has a lower beta than Husker Fund. According to the Treynor
measure, the performance of Buckeye Fund
A) is better than the performance of Husker Fund.
B) is the same as the performance of Husker Fund.
C) is poorer than the performance of Husker Fund.
D) cannot be measured as there are no data on the alpha of the portfolio.
E) None of the options are correct.
18) Suppose two portfolios have the same average return and the same standard deviation of
returns, but Buckeye Fund has a higher beta than Husker Fund. According to the Treynor
measure, the performance of Buckeye Fund
A) is better than the performance of Husker Fund.
B) is the same as the performance of Husker Fund.
C) is poorer than the performance of Husker Fund.
D) cannot be measured as there are no data on the alpha of the portfolio.
E) None of the options are correct.
19) Morningstar’s RAR method
I. is one of the most widely-used performance measures.
II. indicates poor performance by placing up to 5 darts next to the fund’s name.
III. computes fund returns adjusted for loads.
IV. computes fund returns adjusted for risk.
V. produces ranking results that are the same as those produced with the Sharpe measure.
A) I, II, and IV
B) I, III, and IV
C) I, IV, and V
D) I, II, IV, and V
E) I, II, III, IV, and V
20) Suppose you purchase 100 shares of GM stock at the beginning of year 1 and purchase
another 100 shares at the end of year 1. You sell all 200 shares at the end of year 2. Assume that
the price of GM stock is $50 at the beginning of year 1, $55 at the end of year 1, and $65 at the
end of year 2. Assume no dividends were paid on GM stock. Your dollar-weighted return on the
stock will be ________ your time-weighted return on the stock.
A) higher than
B) the same as
C) less than
D) exactly proportional to
E) More information is necessary to answer this question.
21) 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
A) 11.5%.
B) 14%.
C) 15%.
D) 16%.
22) Suppose the risk-free return is 3%. The beta of a managed portfolio is 1.75, the alpha is 0%,
and the average return is 16%. Based on Jensen’s measure of portfolio performance, you would
calculate the return on the market portfolio as
A) 12.3%.
B) 10.4%.
C) 15.1%.
D) 16.7%.
23) Suppose the risk-free return is 6%. The beta of a managed portfolio is 1.5, the alpha is 3%,
and the average return is 18%. Based on Jensen’s measure of portfolio performance, you would
calculate the return on the market portfolio as
A) 12%.
B) 14%.
C) 15%.
D) 16%.
24) 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
A) greater than the arithmetic average return.
B) equal to the arithmetic average return.
C) less than the arithmetic average return.
D) equal to the market return.
E) It cannot be determined from the information given.
25) Suppose you buy 100 shares of Abolishing Dividend Corporation at the beginning of year 1
for $80. Abolishing Dividend Corporation pays no dividends. The stock price at the end of year 1
is $100, $120 at the end of year 2, and $150 at the end of year 3. The stock price declines to $100
at the end of year 4, and you sell your 100 shares. For the four years, your geometric average
return is
A) 0.0%.
B) 1.0%.
C) 5.7%.
D) 9.2%.
E) 34.5%.
26) You want to evaluate three mutual funds using the information ratio measure for
performance evaluation. The risk-free return during the sample period is 6%, and the average
return on the market portfolio is 19%. The average returns, residual standard deviations, and
betas for the three funds are given below.
Average Return
Residual
Standard
Deviation
Beta
Fund A
20
%
4.00
%
0.8
Fund B
21
%
1.25
%
1.0
Fund C
23
%
1.20
%
1.2
The fund with the highest information ratio measure is
A) Fund A.
B) Fund B.
C) Fund C.
D) Funds A and B (tied for highest).
E) Funds A and C (tied for highest).
27) You want to evaluate three mutual funds using the Sharpe measure for performance
evaluation. The risk-free return during the sample period is 6%. The average returns, standard
deviations, and betas for the three funds are given below, as are the data for the S&P 500 Index.
Average Return
Standard
Deviation
Beta
Fund A
24
%
30
%
1.5
Fund B
12
%
10
%
0.5
Fund C
22
%
20
%
1.0
S&P 500
18
%
16
%
1.0
The fund with the highest Sharpe measure is
A) Fund A.
B) Fund B.
C) Fund C.
D) Funds A and B (tied for highest).
E) Funds A and C (tied for highest).
28) You want to evaluate three mutual funds using the Sharpe measure for performance
evaluation. The risk-free return during the sample period is 4%. The average returns, standard
deviations, and betas for the three funds are given below, as are the data for the S&P 500 Index.
Average Return
Standard
Deviation
Beta
Fund A
18
%
38
%
1.6
Fund B
15
%
27
%
1.3
Fund C
11
%
24
%
1.0
S&P 500
10
%
22
%
1.0
The fund with the highest Sharpe measure is
A) Fund A.
B) Fund B.
C) Fund C.
D) Funds A and B (tied for highest).
E) Funds A and C (tied for highest).
29) 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.
Average Return
Residual
Standard
Deviation
Beta
Fund A
23
%
30
%
1.3
Fund B
20
%
19
%
1.2
Fund C
19
%
17
%
1.1
S&P 500
18
%
15
%
1.0
The investment with the highest Sharpe measure is
A) Fund A.
B) Fund B.
C) Fund C.
D) the index.
E) Funds A and C (tied for highest).
30) You want to evaluate three mutual funds using the Treynor measure for performance
evaluation. The risk-free return during the sample period is 6%. The average returns, standard
deviations, and betas for the three funds are given below, in addition to information regarding the
S&P 500 Index.
Average Return
Standard
Deviation
Beta
Fund A
13
%
10
%
0.5
Fund B
19
%
20
%
1.0
Fund C
25
%
30
%
1.5
S&P 500
18
%
16
%
1.0
The fund with the highest Treynor measure is
A) Fund A.
B) Fund B.
C) Fund C.
D) Funds A and B (tied for highest).
E) Funds A and C (tied for highest).
31) You want to evaluate three mutual funds using the Jensen measure for performance
evaluation. The risk-free return during the sample period is 6%, and the average return on the
market portfolio is 18%. The average returns, standard deviations, and betas for the three funds
are given below.
Average Return
Residual
Standard
Deviation
Beta
Fund A
17.6
%
10
%
1.2
Fund B
17.5
%
20
%
1.0
Fund C
17.4
%
30
%
0.8
The fund with the highest Jensen measure is
A) Fund A.
B) Fund B.
C) Fund C.
D) Funds A and B (tied for highest).
E) Funds A and C (tied for highest).
32) 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
A) –1.75%.
B) 4.08%.
C) 6.74%.
D) 11.46%.
E) 12.35%.
33) 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 dollar-weighted return on your investment is
A) −1.75%.
B) 4.08%.
C) 8.53%.
D) 8.00%.
E) 12.35%.