Q&A Hero

Q: Asset allocation represents an attempt by individuals or portfolio managers to determine what? A.percentage of assets should be distributed to beneficiaries. B.mutual funds are appropriate for investment based on risk and return. C.percent of funds under management should be invested in stocks, bonds, and the like. D.brokerage houses best meet their needs.

Q: Benchmark portfolios are used to: A.ensure compliance with government regulations. B.enhance the return on portfolios. C.reduce risk through careful hedging strategies. D.measure and compare the performance of portfolio managers.

Q: In an index fund, A.returns are adjusted for changes in the consumer price index. B.funds are invested in a mutual fund that attempts to replicate the performance of a major market index. C.investors are guaranteed returns equal to a major market index. D.high commissions and management fees are charged because of attempts to beat the market.

Q: A firm with an alpha of .5: A.has performed half as well as the market. B.has performed above the market line. C.has performed below the market line. D.is likely to have a high beta.

Q: Excess returns are equal to the: A.total portfolio return minus the beta. B.total portfolio return minus the return on the S&P 500. C.total portfolio return minus the risk-free rate. D.total portfolio return minus the standard deviation.

Q: Fund managers normally compare their performance to: A.a benchmark portfolio. B.Moody's Bond ratings. C.the Barron's Confidence Index. D.None of the above

Q: The degree of association between the independent and dependant variables is measured by: A.the beta. B.the standard deviation. C.the coefficient of determination. D.A and B

Q: In examining the performance of fund managers, the return measure commonly used is: A.the standard deviation. B.the beta. C.excess returns. D.total returns.

Q: The best way to measure adherence to the objectives of money managers and the financial needs of investors is: A.to calculate the total returns on the portfolios that they manage. B.to evaluate the risk exposure that the fund manager has accepted. C.to calculate the dividend income that the portfolio has achieved. D.to calculate the capital gains that the portfolio has achieved.

Q: Asset allocation is generally ________________ stock selection. A.less important than B.more important than C.of equal importance to D.none of the above are true

Q: A mutual fund with excess returns very similar to those of the market will have an R2 (coefficient of determination) of: A.slightly less than 1. B.slightly greater than 1. C.greater than or less than one. D.There is not enough information to tell

Q: A positive alpha is an indication of: A.low risk. B.high risk. C.superior performance. D.low diversification.

Q: According to a study by John McDonald published in the Journal of Financial and Quantitative Analysis, portfolio managers generally: A.follow the objectives initially set for the portfolio. B.set objectives for the portfolio but don't follow them. C.have difficulty following the portfolio objectives. D.None of the above

Q: One primary reason for the long-term average performance of mutual funds in general is: A.inflation. B.high transaction costs. C.volatile stock market conditions. D.None of the above

Q: According to numerous studies conducted by various professors, portfolio managers generally: A.outperform the market on a risk-adjusted basis. B.perform the same as the market in terms of risk-adjusted returns. C.under-perform the market. D.greatly outperform the market on a risk-adjusted basis.

Q: Which of the following is the final measure used to evaluate a portfolio manager's performance using the Jensen approach? A.Alpha ONLY B.Alpha and the standard deviation C.Standard deviation D.None of the above

Q: The measure of performance defined as the difference between a fund's excess return and a point on the market line corresponding to the fund's beta is called: A.alpha. B.average differential return. C.the Jensen measure. D.More than one of the above

Q: Under the Jensen approach, if the market rate of excess returns is 5.75%, a portfolio with beta of .9 should provide excess returns of: A.5.175%. B.4.5%. C.5%. D.There is not enough information to tell

Q: If the portfolio return is 10%, and the U.S. T-bill rate is 5.75%, what is the Treynor measure of excess returns? A..4250 B..0425 C..7391 D.There is not enough information to tell

Q: The only difference between the Sharpe and Treynor approaches is that the Treynor approach evaluates excess returns based on: A.total risk. B.unsystematic risk. C.systematic risk. D.None of the above

Q: The Sharpe measure on a portfolio which earns 12%, with a standard deviation of 30%, and beta of 1.27, is: A..40. B..094. C..508. D.There is not enough information

Q: Under the _____ approach, excess returns on a portfolio are compared to the total risk of the portfolio. A.Sharpe B.Treynor C.Jensen D.More than one of the above

Q: The term excess returns is commonly defined as: A.total portfolio returns, minus the market rate. B.total portfolio returns, minus the risk-free rate. C.(portfolio returns minus the risk-free rate) divided by beta. D.None of the above

Q: The least risk exposure would be appropriate for a mutual fund which: A.generates income for investors living on a fixed income. B.is oriented toward capital gains for wealthy investors. C.is designed for young, upwardly mobile professionals. D.None of the above

Q: Professional money managers may be evaluated based on: A.their adherence to stated objectives. B.their ability to efficiently diversify the portfolio. C.their return, relative to degree of risk. D.All of the above

Q: Under what conditions might a return of 15% be actually worse than a return of 10%? A.In a bull market B.In a bear market C.On a risk-adjusted basis D.More than one of the above

Q: Asset managers typically lose their jobs because of poorly allocated portfolios under a given market condition.

Q: Using the Jensen approach, the adequacy of a portfolio manager's performance cannot be judged against the market line.

Q: Adherence to objectives as measured by risk exposure is important in evaluating a fund manager because risk is one of the variables a money manager can directly control.

Q: Jensen uses alpha as a measure of performance.

Q: To achieve effective diversification, a fund must have 80 to 100 different securities.

Q: Most funds' performance in terms of R2 is poor.

Q: R2 is a good measure of efficient diversification.

Q: Sharpe uses beta as a measure of risk.

Q: Treynor uses beta as a measure of risk.

Q: Over 20-year rolling periods, the worst performance by small company stocks was positive, according to Ibbotson and Associates.

Q: Most funds show a positive performance compared to a market average.

Q: Alpha must always be a positive number.

Q: Buying a mutual fund is a good way to diversify.

Q: The relationship between excess returns and the portfolio beta is represented by the market line.

Q: Most law suits against fund managers are for poor performance in terms of return.

Q: A fund manager has almost total control over the beta of his portfolio.

Q: The Jensen study indicates that mutual fund managers tend to have very superior performances.

Q: A portfolio manager with a beta less than one should be expected to provide higher returns than the market.

Q: Major studies have shown that fund managers in general are unable to efficiently diversify the portfolios primarily due to a small number of securities.

Q: The effectiveness of portfolio diversification can be measured by the coefficient of determination, which is the correlation between excess returns on the market and those on the fund.

Q: Studies by Ippolito and Goodwin indicate that mutual fund managers are superior performers.

Q: Michael Jensen uses the security market line to evaluate excess returns on investments.

Q: Under the Sharpe, Treynor, and Jensen approaches, the return measurement must be compared to risk in some form.

Q: When the U.S. T-bill rate is 5.75%, the excess returns on a portfolio earning 14% would be 8.25%.

Q: The wise money manager will generally adhere strictly to stated objectives.

Q: In general, the best portfolio managers are those who earn the highest returns.

Q: What is a major reason that entities invest in private equity funds?A.Higher returns than can be earned from the stock marketB.The joy of seeing new companies start upC.The safety of the investmentD.None of the above

Q: One exit strategy for venture capitalists is:A.to pull their money out when the company first makes a profit.B.the company goes public.C.to stop funding the venture.D.None of the above

Q: A corporate venture capital fund is:A.a fund operated by private investors.B.a fund operated by a corporation.C.a fund operated for a non-profit.D.None of the above

Q: The venture fund managers are also called:A.core specialists.B.general partners.C.hurdle managers.D.None of the above

Q: The hurdle rate is:A.the rate of money expenditure in a new venture.B.the rate charged to the most credit-worthy investors.C.the rate paid to the investors before the general partners' cut.D.the rate of interest charged on the borrowing firm by the venture capitalists.

Q: Limited partners in venture capital investment funds typically receive ____ of the profits.A.20%B.100%C.50%D.80%

Q: A follow-on fund is:A.a fund which follows new emerging ventures.B.an existing fund that is raising another fund.C.a very risky hedge fund.D.a special type of CD.

Q: Kohlberg Kravis and Roberts (KKR) is best known as a:A.hedge fund.B.buy-out fund.C.no-load fund.D.core-satellite fund.

Q: What is characteristic of late-stage companies?A.They are near bankruptcyB.They are late to bring products to the marketC.They are producing and shipping goods and are often two or three years away from an initial public offeringD.They are highly risky, and the failure rate for venture capital investors is quite high

Q: What are buy-out funds?A.A hedge fund that buys out overstocked inventoryB.A fund that purchases existing public companies or a division of a public company that needs to be restructuredC.A fund which holds only money market securitiesD.None of the above

Q: Seed capital is usually supplied by investors called:A.hard-core investors.B.angel investors.C.hedge fund investors.D.None of the above

Q: The most common categories of private equity are:A.collectibles.B.venture capital, leveraged buyouts, and mezzanine debt.C.money markets.D.None of the above

Q: All equity investments in nonpublic companies is referred to as:A.core-satellite strategy.B.a hedge fund.C.private equity.D.None of the above

Q: Why do alternative investments make sense for institutional investors?A.They reduce the rate of return and increase the standard deviation of the portfolioB.They increase the rate of return and reduce the standard deviation of the portfolioC.They reduce the rate of return and reduce the standard deviation of the portfolioD.They increase the rate of return and increase the standard deviation of the portfolio

Q: One method professional managers use to manage pension funds, endowment funds, foundations, and other large portfolios that have a long-term focus with required payout is the:A.Markowitz method.B.core-satellite portfolio approach.C.market line method.D.capital market line method.

Q: Relative to other asset classes, hedge funds are:A.not highly correlated.B.negatively correlated.C.not correlated at all.D.related only to the currencies.

Q: The risk/return trade-off with hedge funds over time has been:A.negative.B.positive.C.neutral.D.undetermined.

Q: Other types of hedge funds deal in areas like:A.collectible football cards.B.artwork masterpieces.C.currencies and commodities.D.collectible muscle cars.

Q: A strategy that buys a convertible security for the income and then sells the common stock short is called:A.convertible arbitrage.B.no-bias arbitrage.C.long/short bias.D.merger arbitrage.

Q: Merger arbitrage funds:A.make their money investing in only foreign funds.B.make their money betting on the long position of utility stocks.C.make no money, only hold long portfolios.D.make their money betting on the completion or failure of the merger.

Q: A fund which invests in companies that are in or close to bankruptcy is called:A.a short/long bias fund.B.a market neutral fund.C.a distressed fund.D.a sloan fund.

Q: Any change in the value of a company due to an event can create an opportunity to profit. What fund takes advantage of this fact?A.Event-driven fundB.No-bias fundC.Long/short equity fundD.Distressed fund

Q: A fund that always has a negative bias and can be 100% short or a blend of short and long is:A.a no-bias fund.B.an event-driven fund.C.a short-bias fund.D.a long-bias fund.

Q: The No-Bias hedge fund strategy is to:A.use multiple stocks to sell short or long.B.pair two stocks in the same industry, sell one short and keep one long.C.use no stocks, only CDs.D.None of the above

Q: Market neutral funds are:A.neither long nor short in their strategy.B.only long in their strategy.C.only short in their strategy.D.follow a 45ï‚°Market Line.

Q: Hedge fund managers today construct a portfolio with a beta that:A.is lower in rising markets and a higher in falling markets.B.is higher in rising markets and lower in falling markets.C.is market neutral.D.is not relevant.

Q: Alfred Jones' original strategy was to:A.identify strong and weak stocks, buy strong ones, short the weak ones, and use leverage to enhance the returns.B.buy only weak stocks and hold them long.C.buy only strong stocks and hold them long.D.identify strong and weak stocks, buy weak ones, short the strong ones, and avoid leverage.

Q: The first hedge fund used a strategy to:A.hedge against a rising market.B.hedge against a falling market.C.speculate on a rising market.D.speculate on a falling market.