Chapter 27 – The Theory of Active Portfolio Management
27-1
Chapter 27
The Theory of Active Portfolio Management
Multiple Choice Questions
1. In the Treynor-Black model
Difficulty: Moderate
2. Absent research, you should assume the alpha of a stock
Difficulty: Moderate
27-2
3. If you begin with a ______ and obtain additional data from and experiment you can form a
______.
Difficulty: Moderate
4. Benchmark portfolio risk is defined as
Difficulty: Moderate
5. Benchmark portfolio risk
Difficulty: Moderate
27-3
6. ____________ can be used to measure forecast quality and guide in the proper adjustment
of forecasts.
Difficulty: Moderate
7. Even low-quality forecasts have proven to be valuable because R-squares of only
____________ in regressions of analysts’ forecasts can be used to substantially improve
portfolio performance.
0.001134 to 0.001536.
Difficulty: Moderate
27-5
11. Alpha forecasts must be ____________ to account for less-than-perfect forecasting
quality. When alpha forecasts are ____________ to account for forecast imprecision, the
resulting portfolio position becomes ____________.
Difficulty: Moderate
12. Tracking error is defined as
Difficulty: Moderate
27-6
13. The tracking error of an optimized portfolio can be expressed in terms of the
____________ of the portfolio and thus reveal ____________.
Difficulty: Moderate
14. The Treynor-Black model is a model that shows how an investment manager can use
security analysis and statistics to construct __________.
Difficulty: Easy
15. If a portfolio manager consistently obtains a high Sharpe measure, the manager’s
forecasting ability __________.
Difficulty: Easy
27-7
16. Active portfolio management consists of __________.
Difficulty: Easy
17. Passive portfolio management consists of __________.
Difficulty: Easy
18. The critical variable in the determination of the success of the active portfolio is
________.
Difficulty: Moderate
27-9
22. The beta of an active portfolio is 1.36. The standard deviation of the returns on the market
index is 22%. The nonsystematic variance of the active portfolio is 1.2%. The standard
deviation of the returns on the active portfolio is __________.
Difficulty: Difficult
23. Consider the Treynor-Black model. The alpha of an active portfolio is 2%. The expected
return on the market index is 16%. The variance of return on the market portfolio is 4%. The
nonsystematic variance of the active portfolio is 1%. The risk-free rate of return is 8%. The
beta of the active portfolio is 1. The optimal proportion to invest in the active portfolio is
__________.
Difficulty: Difficult
27–10
24. Consider the Treynor-Black model. The alpha of an active portfolio is 1%. The expected
return on the market index is 16%. The variance of the return on the market portfolio is 4%.
The nonsystematic variance of the active portfolio is 1%. The risk-free rate of return is 8%.
The beta of the active portfolio is 1.05. The optimal proportion to invest in the active portfolio
is __________.
Difficulty: Difficult
25. There appears to be a role for a theory of active portfolio management because
Difficulty: Easy
27–11
26. The Treynor-Black model
Difficulty: Easy
Difficulty: Easy
28. To improve future analyst forecasts using the statistical properties of past forecasts, a
regression model can be fitted to past forecasts. The intercept of the regression is a
__________ coefficient, and the regression beta represents a __________ coefficient.
Difficulty: Moderate