Fundamentals of Investments, 8e (Jordan)
Chapter 13 Performance Evaluation and Risk Management
1) Which one of the following assesses the ability of a money manager to balance high returns
with an acceptable level of risk?
A) probability analysis
B) raw return ratio
C) risk assessment
D) performance evaluation
E) market analysis
2) The unadjusted total percentage return on a security that has not been compared to any
benchmark is referred to as which one of the following?
A) raw return
B) indexed return
C) real return
D) marginal return
E) absolute return
3) The risk premium of a portfolio divided by the portfolio’s standard deviation defines which
one of the following performance measures?
A) raw return
B) Value-at-Risk
C) Jensen’s alpha
D) Sharpe ratio
E) Treynor ratio
4) Which one of the following is computed by dividing a portfolio’s risk premium by the
portfolio beta?
A) raw return
B) Value-at-Risk
C) Jensen’s alpha
D) Sharpe ratio
E) Treynor ratio
5) Which one of the following measures a portfolio’s raw return against the expected return
based on the Capital Asset Pricing Model?
A) Sharpe ratio
B) Treynor ratio
C) Jensen’s alpha
D) beta
E) Value-at-Risk
6) Which one of the following concerns a money manager’s control over investment risks,
particularly potential short-run losses?
A) Alpha management
B) Normal distribution management
C) Investment risk management
D) Raw return distributions
E) Volatility performance measures
7) Which one of the following assesses risk by stating the probability of a loss a portfolio might
incur within a stated time period given a specific probability?
A) Sharpe ratio
B) Jensen’s alpha
C) Treynor ratio
D) raw return measurement
E) Value-at-Risk
8) Which one of the following is a statistical model, defined by its mean and standard deviation,
that is used to assess probabilities?
A) variance
B) normal distribution
C) efficient frontier
D) Value-at-Risk
E) Jensen’s alpha
9) Which one of the following measures a security’s return in relation to the total risk associated
with that security?
A) beta
B) Jensen’s alpha
C) Sharpe ratio
D) Treynor ratio
E) Value-at-Risk
10) The Sharpe ratio measures a security’s return relative to which one of the following?
A) total risk
B) diversifiable risk
C) market rate of return
D) risk-free rate
E) systematic risk
11) The Sharpe ratio is best used to evaluate which one of the following?
A) corporate bonds
B) government bonds
C) Treasury bills
D) individual stocks
E) diversified portfolios
12) Which one of the following measures returns in relation to total risk?
A) Treynor ratio
B) Sharpe ratio
C) Jensen’s alpha
D) Value-at-Risk
E) beta
13) Which one of the following values would be the most preferable as a Sharpe ratio?
A) −1.11
B) −0.89
C) 0.00
D) 0.10
E) 1.02
14) Which one of the following measures risk premium in relation to systematic risk?
A) Value-at-Risk
B) Jensen’s alpha
C) beta
D) Sharpe ratio
E) Treynor ratio
15) You are comparing three securities and discover they all have identical Treynor ratios. Given
this information, which one of the following must be true regarding these three securities?
A) They have identical betas.
B) They have the same rates of return.
C) They earn identical rewards per unit of total risk.
D) They earn identical rewards per unit of systematic risk.
E) They have identical Sharpe ratios also.
16) You are comparing three assets which have differing Treynor ratios. Given this, which one
of the following must be true?
A) The assets may all be correctly priced if they have differing betas.
B) The assets have differing rates of return.
C) The assets have differing levels of market risk but equal amounts of total risk.
D) The assets are all mispriced according to CAPM.
E) The preferred investment is the asset with the highest Treynor ratio.
17) You are considering the purchase of a mutual fund. You have found three funds that meet
your basic criteria. Each fund has a different alpha. Which alpha indicates the preferred
investment?
A) the most negative alpha
B) the least negative alpha
C) the zero alpha
D) the lowest positive alpha
E) the highest positive alpha
18) Which one of the following statements is correct in relation to a security that has a negative
Jensen’s alpha?
A) The security is overpriced and will plot below the security market line.
B) The security is overpriced and will plot above the security market line.
C) The security is underpriced and will plot below the security market line.
D) The security is underpriced and will plot above the security market line.
E) The security is incorrectly priced but you cannot tell if it is underpriced or overpriced based
on the information provided.
19) Which one of the following is the best indication that a security is correctly priced according
to the Capital Asset Pricing Model?
A) beta of zero
B) beta of 1.0
C) alpha of zero
D) alpha of 1.0
E) alpha of −1.0
20) Tony brags that his portfolio’s rate of return is “beating the market”. Which one of the
following would best substantiate his claim?
A) positive Sharpe ratio
B) negative Treynor ratio
C) positive Jensen’s alpha
D) zero Value-at-Risk
E) beta greater than 1.0
21) Which of the following should generally only be used to evaluate relatively diversified
portfolios rather than individual securities?
I. Sharpe ratio
II. Treynor ratio
III. Jensen’s alpha
A) I only
B) II only
C) III only
D) I and II only
E) I, II, and III
22) Which of the following measures are dependent upon the accuracy of a security’s beta?
I. Sharpe ratio
II. Treynor ratio
III. Jensen’s alpha
A) I only
B) II only
C) I and II only
D) II and III only
E) I, II, and III
23) Which one of the following is probably the best measure of the performance of a well-
diversified portfolio?
A) Jensen’s alpha
B) Value-at-Risk
C) Jensen-Treynor alpha
D) Sharpe ratio
E) Treynor ratio
24) Which of the following measures should be used to determine if a security should be
included in a master portfolio?
I. Sharpe ratio
II. Treynor ratio
III. Jensen’s alpha
A) I only
B) II only
C) III only
D) I and II only
E) II and III only
25) The Jensen-Treynor alpha is equal to:
A) the Treynor ratio divided by Jensen’s alpha.
B) the Treynor ratio multiplied by Jensen’s alpha.
C) Jensen’s alpha divided by beta.
D) Jensen’s alpha divided by the standard deviation.
E) Jensen’s alpha divided by the Treynor ratio.
26) Which one of the following is measured by the Jensen-Treynor alpha?
A) total return relative to systematic risk
B) risk premium relative to systematic
C) risk premium relative to total risk
D) excess return relative to systematic risk
E) excess return relative to total risk
27) The Sharpe-optimal portfolio will be the investment opportunity set which lies on a straight
line that has which of the following characteristics?
A) the flattest slope when the line intersects the vertical axis at the risk-free rate
B) the steepest slope when the line intersects the vertical axis at the risk-free rate
C) the steepest slope when the line intersects the vertical axis at the origin
D) the flattest slope when the line intersects the vertical axis at the market rate
E) the steepest slope when the line intersects the vertical axis at the market rate
28) A Sharpe-optimal portfolio provides which one of the following for a given set of securities?
A) Jensen’s Alpha
B) highest possible level of risk
C) highest level of return for a market-equivalent level of risk
D) highest excess return per unit of systematic risk
E) highest risk premium per unit of total risk
29) You want to create the best portfolio that can be derived from two assets. Which one of the
following will help you identify that portfolio?
A) highest portfolio beta
B) market equivalent level of risk
C) highest possible rate of return
D) Treynor-minimal portfolio
E) Sharpe-optimal portfolio
30) Which measure would you use to know whether alpha is truly significant or just the result of
random chance?
A) Jensen’s alpha
B) Information ratio
C) Jensen-Treynor alpha
D) Sharpe ratio
E) Treynor ratio
31) Which metric measures how volatile a fund’s returns are relative to its benchmark?
A) Jensen’s alpha
B) Information ratio
C) Tracking error
D) Sharpe ratio
E) Treynor ratio
32) Which metric describes the percentage of a fund’s movement which can be explained by
movements in the market?
A) Jensen’s alpha
B) Information ratio
C) Tracking error
D) R Squared
E) Treynor ratio
33) Which one of the following is the primary purpose of the Value-at-Risk computation?
A) determine the 99 percent probability range given an abnormal distribution
B) evaluate the risk-return tradeoff for a given mix of securities
C) evaluate the probability of a significant loss
D) determine the portfolio that maximizes the risk premium per unit of total risk
E) determine the portfolio that maximizes the excess return per unit of systematic risk
34) Which one of the following is the best interpretation of this VaR statistic: Prob (Rp ≤ – 0.15)
= 37%?
A) If your portfolio declines by 15 percent or more, that decline is expected to be followed by a
37 percent increase in value.
B) Your portfolio is expected to lose at least 15 percent, but not more than 37 percent in any
given year.
C) There is a 37 percent chance that your portfolio will decline in value by at least 15 percent
over the next year.
D) Sometime in the future, your portfolio is expected to lose 15 percent or more in a single year,
but have an overall average rate of return of 37 percent.
E) There is a 37 percent chance that your portfolio will lose at least 15 percent of its value over
the next 10 years.
35) The Value-at-Risk measure assumes which one of the following?
A) returns are normally distributed
B) portfolios lie on the efficient frontier
C) all portfolios are fully diversified
D) returns tend to follow repetitive patterns
E) the risk premium is constant over time
36) Which one of the following Value-at-Risk measures would be most appropriate for a
portfolio designed for a very risk-adverse investor?
A) Prob (Rp ≤ − 0.20) = 100%
B) Prob (Rp ≤ − 0.15) = 50%
C) Prob (Rp ≤ − 0.10) = 25%
D) Prob (Rp ≤ − 0.10) = 10%
E) Prob (Rp ≤ − 0.05) = 1%
37) Which one of the following statements is true concerning VaR?
A) VaR ignores time.
B) VaR only applies to time periods of one year.
C) VaR applies only to time periods equal to or greater than one year.
D) VaR values can be computed for monthly time periods.
E) VaR is accurate only for time periods less than one year.
38) Which of the following are related to VaR analysis?
I. beta
II. standard deviation
III. expected return
IV. time
A) I and III only
B) II and IV only
C) I, III, and IV only
D) II, III, and IV only
E) I, II, III, and IV
39) You have computed the expected return using VaR with a 2.5 percent probability for a one-
year period of time. How would this expected return be expressed on a normal distribution
curve?
A) lower tail starting at the point that is 2.5 standard deviations below the mean
B) lower tail of a 95 percent probability range
C) the point that corresponds to 2.5 standard deviations below the mean
D) the point that represents the lower end of the 90 percent probability range
E) the negative range that lies within 2.5 standard deviations of the mean
40) Which one of the following correctly states the VaR for a 3-year period with a 2.5 percent
probability?
A) Prob[Rp,T ≤ E(Rp) × 3 – 1.645 × σp √3]
B) Prob[Rp,T ≤ E(Rp) × √3 – 1.645 × σp 3]
C) Prob[Rp,T ≤ E(Rp) × √3 – 1.645 × σp √3]
D) Prob[Rp,T ≤ E(Rp) × 3 – 1.960 × σp √3]
E) Prob[Rp,T ≤ E(Rp) × √3 – 1.960 × σp 3]
41) A portfolio has a 2.0 percent chance of losing 15 percent or more according to the VaR when
T = 1. This can be interpreted to mean that the portfolio is expected to have an annual loss of 15
percent or more once in every how many years?
A) 1.0
B) 2.0
C) 25
D) 50
E) 100