Investments & Securities Chapter 27 The Theory Active Portfolio Management Purely Passive Strategy Defined One That

Chapter 27 – The Theory of Active Portfolio Management

27–12

29. A purely passive strategy is defined as

Difficulty: Easy

30. Consider these two investment strategies:

Strategy ___ is the dominant strategy because __________.

Difficulty: Moderate

27–13

31. Consider these two investment strategies:

Strategy ___ is the dominant strategy because __________.

Difficulty: Moderate

32. The Treynor-Black model assumes that

Difficulty: Moderate

27–14

33. The Treynor-Black model does not assume that

Difficulty: Moderate

34. Consider the Treynor-Black model. The alpha of an active portfolio is 3%. The expected

return on the market index is 18%. The standard deviation of the return on the market

portfolio is 25%. The nonsystematic standard deviation of the active portfolio is 15%. The

risk-free rate of return is 6%. The beta of the active portfolio is 1.2. The optimal proportion to

invest in the active portfolio is __________.

Difficulty: Difficult

27–16

38. A manager who uses the mean-variance theory to construct an optimal portfolio will

satisfy

Difficulty: Easy

39. Ideally, clients would like to invest with the portfolio manager who has

Difficulty: Easy

27–17

40. An active portfolio manager faces a tradeoff between

I) using the Sharpe measure.

II) using mean-variance analysis.

III) exploiting perceived security mispricings.

IV) holding too much of the risk-free asset.

V) letting a few stocks dominate the portfolio.

Difficulty: Difficult

41. To determine the optimal risky portfolio in the Treynor-Black Model, macroeconomic

forecasts are used for the _________ and composite forecasts are used for the __________.

Difficulty: Moderate

27–18

42. The beta of an active portfolio is 1.45. The standard deviation of the returns on the market

index is 22%. The nonsystematic variance of the active portfolio is 3%. The standard

deviation of the returns on the active portfolio is __________.

Difficulty: Difficult

43. Consider the Treynor-Black model. The alpha of an active portfolio is 1%. The expected

return on the market index is 11%. The variance of return on the market portfolio is 6%. The

nonsystematic variance of the active portfolio is 2%. The risk-free rate of return is 4%. The

beta of the active portfolio is 1.1. The optimal proportion to invest in the active portfolio is

__________.

Difficulty: Difficult

27–19

44. Consider the Treynor-Black model. The alpha of an active portfolio is 3%. The expected

return on the market index is 10%. The variance of the return on the market portfolio is 4%.

The nonsystematic variance of the active portfolio is 2%. The risk-free rate of return is 3%.

The beta of the active portfolio is 1.15. The optimal proportion to invest in the active portfolio

is __________.

Difficulty: Difficult

45. Consider the Treynor-Black model. The alpha of an active portfolio is 2%. The expected

return on the market index is 12%. The variance of the return on the market portfolio is 4%.

The nonsystematic variance of the active portfolio is 2%. The risk-free rate of return is 3%.

The beta of the active portfolio is 1.15. The optimal proportion to invest in the active portfolio

is __________.

Difficulty: Difficult

27–20

46. Perfect timing ability is equivalent to having __________ on the market portfolio.

Difficulty: Easy

47. Kane, Marcus, and Trippi (1999) show that the annualized fee that investor should be

willing to pay for active management, over and above the fee charged by a passive index

fund, depends on

I) the investor’s coefficient of risk aversion

II) the value of at-the-money call option on the market portfolio

III) the value of out-of-the-money call option on the market portfolio

IV) the precision of the security analyst

V) the distribution of the squared information ratio of in the universe of securities

Difficulty: Moderate

27–21

48. Kane, Marcus, and Trippi (1999) show that the annualized fee that investor should be

willing to pay for active management, over and above the fee charged by a passive index

fund, does not depend on

I) the investor’s coefficient of risk aversion

II) the value of at-the-money call option on the market portfolio

III) the value of out-of-the-money call option on the market portfolio

IV) the precision of the security analyst

V) the distribution of the squared information ratio of in the universe of securities

Difficulty: Moderate

Short Answer Questions

49. Discuss the Treynor-Black model.

Difficulty: Moderate

27–22

50. You have a record of an analyst’s past forecasts of alpha. Describe how you would use this

information within the context of the Treynor-Black model to determine the forecasting

ability of the analyst.

You can use the index model and valid estimates of beta, you can estimate the ex-post alphas

from the average realized return and the return on the market index. The equation is

Difficulty: Difficult