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Chapter24PortfolioPerformanceEvaluation602MultipleChoiceQuestions1.TradingactivitybymutualfundsjustpriortoquarterlyreportingdatesisknownasA)insidertrading.B)programtrading.C)passivesecurityselection.D)windowdressing.E)noneoftheabove.Answer:DDifficulty:ModerateRationale:Mutualfundsmustdiscloseportfoliocompositionquarterly,andtradingactivitythatimmediatelyprecedesthereportingdateisreferredtoaswindowdressing.Thespeculationisthatwindowdressinginvolveschangesinportfoliocomposition,whichgivestheappearanceofsuccessfulstockselection.2.Thecomparisonuniverseis__________.A)aconceptfoundonlyinastronomyB)thesetofallmutualfundsintheworldC)thesetofallmutualfundsintheU.S.D)asetofmutualfundswithsimilarriskcharacteristicstoyourmutualfundE)noneoftheaboveAnswer:DDifficulty:EasyRationale:Amutualfundmanagerisevaluatedagainsttheperformanceofmanagersoffundsofsimilarriskcharacteristics.3.__________didnotdevelopapopularmethodforrisk-adjustedperformanceevaluationofmutualfunds.A)EugeneFamaB)MichaelJensenC)WilliamSharpeD)JackTreynorE)AandBAnswer:ADifficulty:EasyRationale:MichaelJensen,WilliamSharpe,andJackTreynordevelopedpopularmodelsformutualfundperformanceevaluation.Chapter24PortfolioPerformanceEvaluation6034.Henriksson(1984)foundthat,onaverage,betasoffunds__________duringmarketadvancesA)increasedverysignificantlyB)increasedslightlyC)decreasedslightlyD)decreasedverysignificantlyE)didnotchangeAnswer:CDifficulty:ModerateRationale:Portfoliobetasshouldhavealargevalueifthemarketisexpectedtoperformwellandasmallvalueifthemarketisnotexpectedtoperformwell;thus,theseresultsreflectthepoortimingabilityofmutualfundmanagers.5.Mostprofessionallymanagedequityfundsgenerally__________.A)outperformtheS&P500indexonbothrawandrisk-adjustedreturnmeasuresB)underperformtheS&P500indexonbothrawandrisk-adjustedreturnmeasuresC)outperformtheS&P500indexonrawreturnmeasuresandunderperformtheS&P500indexonrisk-adjustedreturnmeasuresD)underperformtheS&P500indexonrawreturnmeasuresandoutperformtheS&P500indexonrisk-adjustedreturnmeasuresE)matchtheperformanceoftheS&P500indexonbothrawandrisk-adjustedreturnmeasuresAnswer:BDifficulty:ModerateRationale:Mostmutualfundsdonotconsistently,overtime,outperformtheS&P500indexonthebasisofeitherraworrisk-adjustedreturnmeasures.6.Supposetwoportfolioshavethesameaveragereturn,thesamestandarddeviationofreturns,butportfolioAhasahigherbetathanportfolioB.AccordingtotheSharpemeasure,theperformanceofportfolioA__________.A)isbetterthantheperformanceofportfolioBB)isthesameastheperformanceofportfolioBC)ispoorerthantheperformanceofportfolioBD)cannotbemeasuredasthereisnodataonthealphaoftheportfolioE)noneoftheaboveistrue.Answer:BDifficulty:ModerateRationale:TheSharpeindexisameasureofaverageportfolioreturns(inexcessoftheriskfreereturn)perunitoftotalrisk(asmeasuredbystandarddeviation).Chapter24PortfolioPerformanceEvaluation6047.ConsidertheSharpeandTreynorperformancemeasures.Whenapensionfundislargeandhasmanymanagers,the__________measureisbetterforevaluatingindividualmanagerswhilethe__________measureisbetterforevaluatingthemanagerofasmallfundwithonlyonemanagerresponsibleforallinvestments.A)Sharpe,SharpeB)Sharpe,TreynorC)Treynor,SharpeD)Treynor,TreynorE)Bothmeasuresareequallygoodinbothcases.Answer:CDifficulty:ModerateRationale:TheTreynormeasureisthesuperiormeasureiftheportfolioisasmallportionofmanyportfolioscombinedintoalargeinvestmentfund.TheSharpemeasureissuperioriftheportfoliorepresentstheinvestor'stotalriskyinvestmentposition.8.Supposeyoupurchase100sharesofGMstockatthebeginningofyear1,andpurchaseanother100sharesattheendofyear1.Yousellall200sharesattheendofyear2.AssumethatthepriceofGMstockis$50atthebeginningofyear1,$55attheendofyear1,and$65attheendofyear2.AssumenodividendswerepaidonGMstock.Yourdollar-weightedreturnonthestockwillbe__________;yourtime-weightedreturnonthestock.A)higherthanB)thesameasC)lessthanD)exactlyproportionaltoE)moreinformationisnecessarytoanswerthisquestionAnswer:ADifficulty:ModerateRationale:Inthedollar-weightedreturn,thestock'sperformanceinthesecondyear,when200sharesareheld,hasagreaterinfluenceontheoveralldollar-weightedreturn.Thetime-weightedreturnignoresthenumberofsharesheld.Chapter24PortfolioPerformanceEvaluation6059.Supposetherisk-freereturnis4%.Thebetaofamanagedportfoliois1.2,thealphais1%,andtheaveragereturnis14%.BasedonJensen'smeasureofportfolioperformance,youwouldcalculatethereturnonthemarketportfolioasA)11.5%B)14%C)15%D)16%E)noneoftheaboveAnswer:ADifficulty:DifficultRationale:1%=14%-[4%+1.2(x-4%)];x=11.5%.10.Supposetherisk-freereturnis3%.Thebetaofamanagedportfoliois1.75,thealphais0%,andtheaveragereturnis16%.BasedonJensen'smeasureofportfolioperformance,youwouldcalculatethereturnonthemarketportfolioasA)12.3%B)10.4%C)15.1%D)16.7%E)noneoftheaboveAnswer:BDifficulty:DifficultRationale:0%=16%-[3%+1.75(x-3%)];x=10.4%.11.Supposetherisk-freereturnis6%.Thebetaofamanagedportfoliois1.5,thealphais3%,andtheaveragereturnis18%.BasedonJensen'smeasureofportfolioperformance,youwouldcalculatethereturnonthemarketportfolioasA)12%B)14%C)15%D)16%E)