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14) The Sharpe’s measure for Jane Smith’s investment portfolio is 0.40, while the Sharpe’s
measure for the market is 0.30. This information suggests that Smith’s portfolio
A) exhibits superior performance because its risk premium per unit of risk is above that of the
market.
B) exhibits poor performance because its risk premium per unit of risk is below that of the
market.
C) is inadequately diversified, and more securities should be added to the portfolio in order to
bring it in line with the market.
D) is overly diversified, and some securities should be sold to bring the portfolio in line with the
market.
15) Phil has a portfolio with a 13.2% total return. The beta of the portfolio is 1.48 and the
standard deviation is 13%. Currently, the risk-free rate of return is 4% and the overall market has
a total return of 11%. What is the value of Treynor’s measure for Phil’s portfolio?
A) 2.1%
B) 6.2%
C) 7.1%
D) 8.9%
16) 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%. According to the
Treynor measure,
A) Allison has the better portfolio.
B) Brianna has the better portfolio.
C) The portfolio’s are equally desirable.
D) The answer depends on Allsison and Brianna’s risk tolerance.
17) A portfolio has a total return of 14.5%, a beta of 1.54, and a standard deviation of 17.6%. If
the risk free rate is 4.5% and the market return is 10.2%, then Treynor’s measure of this
portfolio’s performance is
A) 2.8%.
B) 3.7%.
C) 6.5%.
D) 9.4%.
18) A stock has a total return of 16.4%, a standard deviation of 14.5% and a beta of 1.63. The
market rate of return is 12.4%, while the market’s Treynor measure is 6.3. What is the value of
the Treynor measure of this portfolio?
A) 2.5%
B) 6.3%
C) 18.4%
D) 27.6%
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.
20) Which of the following measures is based on the capital asset pricing model?
A) Only Sharpe’s measure
B) Only Treynor’s measure
C) Only Jensen’s measure
D) Both Treynor’s and Jenson’s measures
21) 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%.
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.
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 portfolio’s are equally desirable
D) The answer depends on Allsison and Brianna’s risk tolerance
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
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.
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?
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?
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
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13.5 Learning Goal 5
1) Formula plans are high-risk investment strategies that attempt to benefit from cyclical price
movements.
2) Dollar cost averaging is a formula plan to purchase the same number of shares of stock at
regular intervals of time.
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.
4) Investors who use formula plans believe that they have above average ability to time the
market and pick successful investments.
5) A constant-ratio plan requires an investor to continually rebalance the portfolio.
6) A constant plan allows for speculative gains while limiting potential losses.
7) 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.
8) Dollar cost averaging is a procedure by which an investor
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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.
9) 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.
10) 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.
11) When using a constant dollar plan?
A) gains from the speculative portion of the portfolio are transferred to the safe portion of the
portfolio.
B) the amount of money in the speculative portion of the portfolio should decline over time.
C) the percentage of funds in the speculative portion of the portfolio should increase over time.
D) the ratio of safe funds to speculative funds remains constant over time.
12) 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.
13) 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
14) 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.
15) 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
16) 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.
17) Under the variable-ratio plan, additional speculative investments are made when the ratio
A) of conservative investments to speculative investments increases by 10%.
B) of the rate of return on the speculative investments exceeds the overall market return by 1%
or more.
C) of the realized rate of return falls below the desired rate of return by 1% or more.
D) of the value of the speculative investments to the total portfolio value drops below a
predetermined level.
18) An investor adopts a policy of investing in both an aggressive mutual fund and a short-term
bond fund. When the value of the aggressive fund exceeds 65% of the portfolio value, shares of
that fund are sold such that the aggressive fund represents only 45% of the portfolio. This is an
example of a ________ plan.
A) constant-dollar
B) dollar-cost averaging
C) constant-ratio
D) variable-ratio
19) Dollar-cost averaging plans and constant-dollar plans are both formula approaches to
portfolio management. Briefly explain the two plans.
13.6 Learning Goal 6
1) A stop-loss order guarantees that an investor’s unrealized profit will be protected.
2) If an investor has a loss position in an investment and wants to sell it, the best time to sell for
tax purposes is when a capital gain is available against which the loss can be applied.
3) The maximum capital loss that can be applied to ordinary income for income tax purposes in
any one year is $3000.
4) An investor who wants to take advantage of a temporary decline in the price of a stock should
use a limit order.
5) Over a period of time if an investment has not met its return objective, it should be sold.
6) The primary risk in using a GTC limit sell order rather than a market order is that
A) the market price may exceed the limit price when the order is placed.
B) the limit order may not be executed.
C) the limit order may be executed at a price above the market price.
D) the limit order expires at the end of the day and may not be executed.
7) A stop loss order may not protect an investor’s profits if
A) the price drops even slightly below the stop price before the order can be executed.
B) the price enters a prolonged period of gradual decline.
C) an unexpected event cause the price to drop steeply when the markets are closed
D) the stop loss price is never reached
8) Which of the following are characteristics of stop-loss orders?
I. the risk of whipsawing
II. the ability to limit downside losses
III. the guaranteed execution within the order period
IV. the conversion to a market order
A) I and II only
B) III and IV only
C) I, II and IV only
D) II, III and IV only
9) Suppose the shares of the Chickadee Corporation traded seven times in the following
sequence one day last week: 46, 45.88, 45.75, 45.50, 45.63, 46, 46.13. In this case, a limit order
to sell at 46 would have been executed
A) between 46 and 46.13, whereas a market order to sell could have been executed anywhere
between 45.50 and 46.13.
B) anywhere between 45.50 and 46.13, whereas a market order to sell would have been executed
only at 46.
C) only at 46, whereas a market order to sell would have been executed at 46.13.
D) only at 46.13, and a market order to sell would have been executed between 46 and 46.13.
10) The two primary media for warehousing liquidity are
A) money market mutual funds and money market deposit accounts.
B) certificates of deposit and short-term bond funds.
C) certificates of deposit and long-term bond funds.
D) short-term bond funds and asset allocation funds.
11) Which of the following are reasons why a person may want to warehouse liquidity?
I. protect against total loss
II. ability to exploit future opportunities
III. capitalize on the high rates of return available on cash
IV. protect against the need to disturb the existing portfolio
A) I and II only
B) I, II and IV only
C) II, III and IV only
D) I, II, III and IV
12) One important tax rule concerning capital losses is that
A) capital losses are always fully deductible.
B) a maximum of $3,000 of losses in excess of capital gains can be written off against other
income in any one year.
C) a maximum of $10,000 of losses in excess of capital gains can be written off against other
income in any one year.
D) capital losses are never deductible.
13) Which of the following are generally considered to be good investment guidelines?
I. Sell any security that has become riskier than anticipated.
II. Hold all securities until they produce the highest profit attainable.
III. Sell securities only if the profit can be offset with a tax loss.
IV. Sell any security that no longer meets the needs of the investor.
A) I and IV only
B) I and III only
C) I, II and IV only
D) I, II, III and IV
14) Late in the calendar year, Jessica must choose between selling stock that was purchased 2
years ago for $10,000 and has fallen to $7,000 or a different stock that was purchased 1 year ago
for $5,000 and has risen to $7,000. If the investor has no other capital gains, which stock should
she sell?
15) Explain the use of limit orders and stop-loss orders in rebalancing an investor’s stock
portfolio. What are the principal risks in using these orders?