Chapter 24 Portfolio Performance Evaluation Answer Key
Multiple Choice Questions
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.
2.
Mutual funds show ____________ evidence of serial correlation and hedge funds show
____________ evidence of serial correlation.
3.
The comparison universe is
4.
The comparison universe is not
5.
__________ did not develop a popular method for risk-adjusted performance evaluation of
mutual funds.
6.
__________ developed a popular method for risk-adjusted performance evaluation of
mutual funds.
7.
Henriksson (1984) found that, on average, betas of funds __________ during market
advances.
8.
Most professionally managed equity funds generally
9.
Suppose two portfolios have the same average return, 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
10.
Suppose two portfolios have the same average return, 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
11.
Suppose two portfolios have the same average return, 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
12.
Suppose two portfolios have the same average return, 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
13.
Suppose two portfolios have the same average return, 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
14.
Suppose two portfolios have the same average return, 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
15.
Suppose two portfolios have the same average return, the same standard deviation of
returns, but Buckeye Fund has a higher beta than Gator Fund. According to the Sharpe
measure, the performance of Buckeye Fund
16.
Suppose two portfolios have the same average return, the same standard deviation of
returns, but Buckeye Fund has a lower beta than Gator Fund. According to the Sharpe
measure, the performance of Buckeye Fund
17.
Suppose two portfolios have the same average return, the same standard deviation of
returns, but Buckeye Fund has a lower beta than Gator Fund. According to the Treynor
measure, the performance of Buckeye Fund
18.
Suppose two portfolios have the same average return, the same standard deviation of
returns, but Buckeye Fund has a higher beta than Gator Fund. According to the Treynor
measure, the performance of Buckeye Fund
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.
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.
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
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
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
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 year period will be
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
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.
The fund with the highest information ratio measure is