Chapter 18 – Evaluation of Portfolio Performance
1. The two main questions when assessing the performance of an investment manager are: how did the portfolio manager
actually perform, and, why did the portfolio manager perform as he or she did?
a.
True
b.
False
2. Investors want their portfolio managers to completely diversify their portfolio, that is, eliminate all systematic risk.
a.
True
b.
False
3. 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.
a.
True
b.
False
4. The typical proxy for the market portfolio is the S&P 500 Index because it is diversified and price weighted.
Chapter 18 – Evaluation of Portfolio Performance
a.
True
b.
False
5. Maximum drawdown calculates the largest percentage decline in value—from peak to trough—wherever during the
horizon that occurs.
a.
True
b.
False
6. The most common manner of evaluating portfolio managers is a peer group comparison.
a.
True
b.
False
7. Treynor’s performance measure implicitly assumes a completely diversified portfolio.
a.
True
b.
False
Chapter 18 – Evaluation of Portfolio Performance
8. A negative Treynor measure (negative T) for a portfolio always indicates that the portfolio would plot below the SML.
a.
True
b.
False
9. Sharpe’s performance assumes that all portfolios are completely diversified.
a.
True
b.
False
10. The Sharpe measure examines the risk premium per unit of systematic risk.
a.
True
b.
False
11. The Sharpe and Treynor measures complement each other and thus both should be used to measure portfolio
performance.
a.
True
b.
False
12. The Sharpe and Treynor measures always give different rankings.
a.
True
b.
False
13. 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.
a.
True
b.
False
14. The ranking differences between the Sharpe, Treynor, and Jensen performance measures occur because of the
differences in diversification.
a.
True
b.
False
15. The portfolio performance measure that can be most affected by a benchmark error is the Sharpe measure.
a.
True
b.
False
16. 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.
a.
True
b.
False
17. The Sharpe measure of portfolio performance divides the portfolio’s risk premium by the portfolio’s beta.
a.
True
b.
False
18. The market rewards investors for bearing total risk.
a.
True
b.
False
19. The Sortino ratio takes into account the downside risk exposure in the portfolio.
a.
True
b.
False
20. The information ratio permits only relative assessments of performance for different portfolios in a style class.
a.
True
b.
False
21. When applying the Jensen’s alpha measure, the alpha level and significance can vary greatly depending on the
specification of the return-generating model.
a.
True
b.
False
22. The advantage of evaluating a fund’s alpha using a multifactor approach is that it is designed to control for market
style (SMB and HML) and momentum (MOM) risk.
a.
True
b.
False
23. Grinblatt and Titman showed that the manager’s security selection ability can be established by how they adjusted
portfolio weights.
a.
True
b.
False
24. An advantage of the GT statistic is that it can be computed without reference to any specific benchmark.
a.
True
b.
False
25. Attribution analysis separates a portfolio manager’s performance into an allocation effect and selection effect.
a.
True
b.
False
26. Funds with low levels of diversification tend to “beat the market.”
a.
True
b.
False
27. 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.
a.
True
b.
False
28. In evaluating bond performance, the Barclays Aggregate Bond Index is an appropriate risk measure.
a.
True
b.
False
29. The policy effect is a difference in bond portfolio performance from that of a benchmark index due to a difference in
duration.
a.
True
b.
False
30. 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 the rating of the bonds.
a.
True
b.
False
31. A test of bond performance over time indicated that bond portfolio managers are more consistent over time than
equity managers.
a.
True
b.
False
32. 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.
a.
True
b.
False
33. 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.
a.
True
b.
False
34. Overall performance is the total return above the risk-free rate.
a.
True
b.
False
35. Normal portfolios, which are customized benchmarks that reflect the specific styles of alternative managers.
a.
True
b.
False
36. One example of a flawed benchmark is using the median manager from a broad universe in a peer group comparison.
a.
True
b.
False
37. Money-weighted returns set the present value of future cash flows (including future investment contributions and
withdrawals) equal to the level of the initial investment.
a.
True
b.
False
38. According to Global Investment Performance Standards (GIPS), time-weighted rates of return must be used.
a.
True
b.
False
39. One of the goals of the Global Investment Performance Standards (GIPS) is to obtain worldwide acceptance of a
single standard for the calculation and presentation of investment performance based on the principles of fair
representation and full disclosure.
a.
True
b.
False
40. According to Global Investment Performance Standards (GIPS), time-weighted rates of return must be used.
a.
True
b.
False
41. The CFA Institute encourages managers to disclose the volatility of the composite return and to identify benchmarks
that parallel the risk or investment style that the composite tracks.
a.
True
b.
False
42. 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.
deliver on expectations and produce an additional alpha component.
43. The two questions when assessing the performance measurement of an investment manager include:
a.
b.
c.
d.
e.
44. Portfolio managers are often evaluated using a boxplot of returns for a universe of investors over a specific period of
time which is known as a(n)
a.
return adjusted comparison.
b.
efficient frontier comparison.
c.
time plot comparison.
d.
peer group comparison.
e.
None of these are correct.
45. Treynor showed that rational, risk-averse investors always prefer portfolio possibility lines that have
a.
zero slopes.
b.
slightly negative slopes.
c.
highly negative slopes.
d.
highly positive slopes.
e.
highly positive slopes.
46. The measure of performance that divides the portfolio’s risk premium by the portfolio’s beta is the
a.
Sharpe measure.
Chapter 18 – Evaluation of Portfolio Performance
b.
Jensen measure.
c.
Fama measure.
d.
Alternative components model (MCV).
e.
Treynor measure.
47. 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.
48. 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
49. 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.
the average market beta per unit of risk.
50. 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.
the average market beta per unit of risk.
51. 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.
Chapter 18 – Evaluation of Portfolio Performance
e.
the average market beta per unit of risk.
52. 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.
the Jensen measure because it measures the risk-adjusted performance.
53. 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 these are correct.
54. 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.
55. 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
56. 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.
57. 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.
58. 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 portfolio beta.
c.
higher values of the Sortino measure are not desirable, while higher values in the Sharpe ratio are desirable.
d.
it measures standard deviation of total portfolio return.
e.
it measures portfolio beta relative to the market index proxy.
59. Suppose the expected return for the market portfolio and risk-free rate are 13 percent and 3 percent respectively.
Stocks A, B, and C have Treynor measures of 0.24, 0.16, and 0.11, respectively. Based on this information, an investor