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Exam 24: Portfolio Performance Evaluation

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Question 31

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Most professionally managed equity funds generally

A) outperform the S&P 500 Index on both raw and risk-adjusted return measures.
B) underperform the S&P 500 Index on both raw and risk-adjusted return measures.
C) outperform the S&P 500 Index on raw return measures and underperform the S&P 500 Index on risk-adjusted return measures.
D) underperform the S&P 500 Index on raw return measures and outperform the S&P 500 Index on risk-adjusted return measures.
E) match the performance of the S&P 500 Index on both raw and risk-adjusted return measures.

F) A) and D)
G) C) and D)

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Question 32

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The Sharpe, Treynor, and Jensen portfolio performance measures are derived from the CAPM,

A) therefore, it does not matter which measure is used to evaluate a portfolio manager.
B) however, the Sharpe and Treynor measures use different risk measures. Therefore, the measures vary as to whether or not they are appropriate, depending on the investment scenario.
C) therefore, all measure the same attributes.
D) therefore, it does not matter which measure is used to evaluate a portfolio manager. However, the Sharpe and Treynor measures use different risk measures, so therefore, the measures vary as to whether or not they are appropriate, depending on the investment scenario.
E) None of the options are correct.

F) A) and B)
G) C) and E)

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Question 33

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What assumption about risk-adjusted techniques for measuring performance poses a potential problem?

The following data are available relating to the performance of Tiger Fund and the market portfolio: $\begin{array}{lcc} & \text {Tiger } & \text { Market } \\ &&\text { Portfolio }\\\text { Average return } & 18 \% & 15\% \\\text { Standard deviations of returns } & 25\% & 20\% \\\text { Beta } & 1.25 & 1.00 \\\text { Residual standard deviation } &2 \% & 0 \%\end{array}$ The risk-free return during the sample period was 7%. Calculate Sharpe's measure of performance for Tiger Fund.

The following data are available relating to the performance of Scooner Stock Fund and the market portfolio: $\begin{array}{lcc} & \text { Scooner } & \text { Market } \\&&\text { Portfolio }\\\text { Average return } & 19 \% & 12\% \\\text { Standard deviations of returns } & 35\% & 15\% \\\text { Beta } & 1.5 & 1.0 \\\text { Residual standard deviation } & 3.0 \% & 0.0 \%\end{array}$ The risk-free return during the sample period was 6%. What is the Sharpe measure of performance evaluation for Scooner Stock Fund?

The following data are available relating to the performance of Monarch Stock Fund and the market portfolio: $\begin{array}{lcc} & \text { Monarch } & \text { Market } \\ &&\text { Portfolio }\\\text { Average return } & 16 \% & 12\% \\\text { Standard deviations of returns } & 26\% & 22\% \\\text { Beta } & 1.15 & 1.00 \\\text { Residual standard deviation } &1 \% & 0 \%\end{array}$ The risk-free return during the sample period was 4%. Calculate Jensen's measure of performance for Monarch Stock Fund.

You want to evaluate three mutual funds using the Sharpe measure for performance evaluation. The risk-free return during the sample period is 5%. The average returns, standard deviations, and betas for the three funds are given below, as are the data for the S&P 500 Index. $\begin{array}{cc} &\text {Average ReturnResidual } &\text { Standard Deviation }&\text { Beta }\\ \text { Fund A } &23\%&30\%&1.3\\ \text {Fund B } &20\%&19\%&1.2\\ \text { Fund C} &19\%&17\%&1.1\\\text {S\&P 500}&18\%&15\%&1.0\end{array}$ The investment with the highest Sharpe measure is

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. $\begin{array}{cc} &\text {Average ReturnResidual } &\text { Standard Deviation }&\text { Beta }\\ \text { Fund A } &20\%&4.00\%&0.8\\ \text {Fund B } &21\%&1.025\%&1.0\\ \text { Fund C} &23\%&1.20\%&1.2\\\end{array}$ The fund with the highest information ratio measure is

The comparison universe is not

In a particular year, Roll Tide Mutual Fund earned a return of 15% by making the following investments in the following asset classes: $\begin{array}{cc}& \text { Weight } & \text { Return }\\ \text { Bonds } &10\%&6\%\\ \text { Stocks } &90\%&16\%\\\end{array}$ The return on a bogey portfolio was 10%, calculated as follows: $\begin{array}{cc}& \text { Weight } & \text { Return }\\ \text { Bonds (Lehman Brother Index) } &50\%&5\%\\ \text { Stacks (S\&P 500 Index) } &50\%&15\%\\\end{array}$ The total abnormal return on the Roll Tide managed portfolio was

The following data are available relating to the performance of Sooner Stock Fund and the market portfolio: $\begin{array}{lcc} & \text { Sooner } & \text { Market } \\&&\text { Portfolio }\\\text { Average return } & 20 \% & 11\% \\\text { Standard deviations of returns } & 44\% & 19\% \\\text { Beta } & 1.8 & 1.0 \\\text { Residual standard deviation } & 2.0 \% & 0.0 \%\end{array}$ The risk-free return during the sample period was 3%. Calculate the information ratio for Sooner Stock Fund.

Suppose two portfolios have the same average return and the same standard deviation of returns, but Roll Tide Fund has a lower beta than Arc Fund. According to the Treynor measure, the performance of Roll Tide Fund

Suppose you purchase 100 shares of Coca Cola 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 Coca Cola 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 Coca Cola stock. Your dollar-weighted return on the stock will be __________ your time-weighted return on the stock.

__________ developed a popular method for risk-adjusted performance evaluation of mutual funds.

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 period will be

What method of measuring performance is similar to the mean/variance based Sharpe ratio?

Suppose you own two stocks, A and B. In year 1, stock A earns a 2% return and stock B earns a 9% return. In year 2, stock A earns an 18% return and stock B earns an 11% return. Which stock has the higher geometric average return?

The following data are available relating to the performance of Sooner Stock Fund and the market portfolio: $\begin{array}{lcc} & \text { Sooner } & \text { Market } \\&&\text { Portfolio }\\\text { Average return } & 20 \% & 11\% \\\text { Standard deviations of returns } & 44\% & 19\% \\\text { Beta } & 1.8 & 1.0 \\\text { Residual standard deviation } & 2.0 \% & 0.0 \%\end{array}$ The risk-free return during the sample period was 3%. What is the Sharpe measure of performance evaluation for Sooner Stock Fund?

You want to evaluate three mutual funds using the Sharpe measure for performance evaluation. The risk-free return during the sample period is 4%. The average returns, standard deviations, and betas for the three funds are given below, as are the data for the S&P 500 Index. $\begin{array}{cc} &\text {Average ReturnResidual } &\text { Standard Deviation }&\text { Beta }\\ \text { Fund A } &18\%&38\%&1.6\\ \text {Fund B } &15\%&27\%&1.3\\ \text { Fund C} &11\%&24\%&1.0\\\text {S\&P 500}&10\%&22\%&1.0\end{array}$ The fund with the highest Sharpe measure is

The Value Line Index is an equally-weighted geometric average of the returns of about 1,700 firms. The value of an index based on the geometric average returns of three stocks where the returns on the three stocks during a given period were 32%, 5%, and −10%, respectively, is