Q&A Hero

Q: The correct measure of timing ability is ____________ for a portfolio manager who correctly forecasts 55% of bull markets and 55% of bear markets. A. -5% B. 5% C. 10% D. 95%

Q: A passive benchmark portfolio is: I. A portfolio in which the asset allocation across broad asset classes is neutral and not determined by forecasts of performance of the different asset classes II. One in which an indexed portfolio is held within each asset class III. Often called the bogey A. I only B. I and III only C. II and III only D. I, II, and III

Q: __________ portfolio managers experience streaks of abnormal returns that are hard to label as lucky outcomes, and _________ anomalies in realized returns have been sufficiently persistent that portfolio managers could use them to beat a passive strategy over prolonged periods. A. No; no B. No; some C. Some; no D. Some; some

Q: In performance measurement, the bogey portfolio is designed to _________. A. measure the returns to a completely passive strategy B. measure the returns to a similar active strategy C. measure the returns to a given investment style D. equal the return on the S&P 500

Q: Active portfolio managers try to construct a risky portfolio with _______. A. a higher Sharpe ratio than a passive strategy B. a lower Sharpe ratio than a passive strategy C. the same Sharpe ratio as a passive strategy D. very few securities

Q: The market-timing form of active portfolio management relies on __________ forecasting, and the security selection form of active portfolio management relies on __________ forecasting. A. macroeconomic; macroeconomic B. macroeconomic; microeconomic C. microeconomic; macroeconomic D. microeconomic; microeconomic

Q: Consider the theory of active portfolio management. Stocks A and B have the same beta and nonsystematic risk. Stock A has a higher positive alpha than stock B. You should want __________ in your active portfolio. A. equal proportions of stocks A and B B. more of stock A than stock B C. more of stock B than stock A D. The answer cannot be determined from the information given.

Q: Consider the theory of active portfolio management. Stocks A and B have the same positive alpha and the same nonsystematic risk. Stock A has a higher beta than stock B. You should want __________ in your active portfolio. A. equal proportions of stocks A and B B. more of stock A than stock B C. more of stock B than stock A D. The answer cannot be determined from the information given.

Q: The critical variable in the determination of the success of the active portfolio is the stock's __________. A. alpha/nonsystematic risk ratio B. alpha/systematic risk ratio C. delta/nonsystematic risk ratio D. delta/systematic risk ratio

Q: In the Treynor-Black model, the weight of each analyzed security in the portfolio should be proportional to its __________. A. alpha/beta B. alpha/residual variance C. beta/residual variance D. none of these options

Q: If all ______ are ______ in the Treynor-Black model, there would be no reason to depart from the passive portfolio. A. alphas; zero B. alphas; positive C. betas; positive D. standard deviations; positive

Q: In the Treynor-Black model, the contribution of individual security to the active portfolio should be based primarily on the stock's _________. A. alpha B. beta C. residual variance D. information ratio

Q: A market-timing strategy is one in which asset allocation in the stock market __________ when one forecasts that the stock market will outperform Treasury bills. A. decreases B. increases C. remains the same D. may increase or decrease

Q: Active portfolio management consists of: I. Market timing II. Security selection III. Sector selection within given markets IV. Indexing A. I and II only B. II and III only C. I, II, and III only D. I, II, III, and IV

Q: In the Treynor-Black model, security analysts __________. A. analyze the entire universe of stocks B. assume that markets are inefficient C. treat market index as a baseline portfolio from which an active portfolio is constructed D. focus on selecting the best-performing bogey

Q: In the Treynor-Black model, security analysts __________. A. analyze a relatively small number of stocks B. analyze all stocks that are publicly traded C. are redundant D. devote their attention to market timing rather than fundamental analysis

Q: The theory of efficient frontiers has __________. A. no adherents among practitioners B. a small number of adherents among practitioners C. a significant number of adherents among practitioners D. complete support by practitioners

Q: Portfolio performance is often decomposed into various subcomponents, such as the return due to: I. Broad asset allocation across security classes II. Sector weightings within equity markets III. Security selection with a given sector The one decision that contributes most to the fund performance is _____. A. I B. II C. III D. All contribute equally to fund performance.

Q: In the Treynor-Black model, the active portfolio will contain stocks with __________. A. alphas equal to zero B. negative alphas C. positive alphas D. some negative and some positive alphas

Q: Recent analysis indicates that the style of investing is a critical component of fund performance. In fact, on average about _____ of fund performance is attributable to the asset allocation decision. A. 68% B. 74% C. 88% D. 97%

Q: If an investor is a successful market timer, his distribution of monthly portfolio returns will __________. A. be skewed to the left B. be skewed to the right C. exhibit kurtosis D. exhibit neither skewness nor kurtosis

Q: The Treynor-Black model is a model that shows how an investment manager can use security analysis and statistics to construct __________. A. a market portfolio B. a passive portfolio C. an active portfolio D. an index portfolio

Q: One hundred fund managers enter a contest to see how many times in 13 years they can earn a higher return than their competitors. The probability distribution of the number of successful years out of 13 for the best-performing money managers is Out of this sample, chance alone would indicate that there is a ______ probability that someone would beat the market at least 11 times out of 13 years. A. 51.3%B. 65.9%C. 67.1%D. 10.83%

Q: Perfect-timing ability is equivalent to having __________ on the market portfolio. A. a call option B. a futures contract C. a put option D. a forward contract

Q: Probably the biggest problem with evaluating the portfolio performance of actively managed funds is the assumption that __________________________. A. the markets are efficient B. portfolio risk is constant over time C. diversification pays off D. security selection is more valuable than asset allocation

Q: The M2 measure of portfolio performance was developed by ______________. A. Modigliani and Miller B. Modigliani and Modigliani C. Merton and Miller D. Fama and French

Q: 28. In creating the P* portfolio, one mixes the original portfolio P and T-bills to match the _________ of the market. A. alpha B. beta C. excess return D. standard deviation

Q: The __________ calculates the reward to risk trade-off by dividing the average portfolio excess return by the portfolio beta. A. Sharpe ratio B. Treynor measure C. Jensen measure D. appraisal ratio

Q: Which one of the following averaging methods is the preferred method of constructing returns series for use in evaluating portfolio performance? A. Geometric average B. Arithmetic average C. Dollar weighted D. Internal

Q: In a particular year, Lost Hope Mutual Fund made the following investments in asset classes: The return on a bogey portfolio was 12%, based on the following: The contribution of security selection within asset classes to the total extra return was __________. A. -1%B. 0%C. 1%D. 2%

Q: In a particular year, Lost Hope Mutual Fund made the following investments in asset classes: The return on a bogey portfolio was 12%, based on the following: The contribution of asset allocation across markets to the total extra return was __________. A. -1%B. 0%C. 1%D. 2%

Q: In a particular year, Lost Hope Mutual Fund made the following investments in asset classes: The return on a bogey portfolio was 12%, based on the following: The total extra return on the managed portfolio was __________. A. 1%B. 2%C. 3%D. 4%

Q: In a particular year, Salmon Arm Mutual Fund earned a return of 16% by making the following investments in asset classes: The return on a bogey portfolio was 12%, based on the following: The contribution of security selection within asset classes to the total excess return was __________. A. 1.5%B. 2%C. 2.5%D. 3.5%

Q: In a particular year, Salmon Arm Mutual Fund earned a return of 16% by making the following investments in asset classes: The return on a bogey portfolio was 12%, based on the following: The contribution of asset allocation across markets to the total excess return was __________. A. 1.5%B. 2%C. 2.5%D. 3.5%

Q: In a particular year, Salmon Arm Mutual Fund earned a return of 16% by making the following investments in asset classes: The return on a bogey portfolio was 12%, based on the following: The total excess return on the managed portfolio was __________. A. 2%B. 3%C. 4%D. 5%

Q: The average returns, standard deviations, and betas for three funds are given below along with data for the S&P 500 Index. The risk-free return during the sample period is 6%. You want to evaluate the three mutual funds using the Jensen measure for performance evaluation. The fund with the highest Jensen measure of performance is __________. A. fund AB. fund BC. fund CD. S&P 500

Q: The average returns, standard deviations, and betas for three funds are given below along with data for the S&P 500 Index. The risk-free return during the sample period is 6%. You want to evaluate the three mutual funds using the Treynor measure for performance evaluation. The fund with the highest Treynor measure of performance is __________. A. fund AB. fund BC. fund CD. The answer cannot be determined from the information given.

Q: The average returns, standard deviations, and betas for three funds are given below along with data for the S&P 500 Index. The risk-free return during the sample period is 6%. You want to evaluate the three mutual funds using the Sharpe ratio for performance evaluation. The fund with the highest Sharpe ratio of performance is __________. A. fund AB. fund BC. fund CD. The answer cannot be determined from the information given.

Q: Based on the example used in the book, a perfect market timer would have made _______ by 2008 on a $1 investment made in 1926. A. $100 B. $1,626 C. $1.5 million D. $36.7 billion

Q: Which one of the following is largely based on forecasts of macroeconomic factors? A. Security selection B. Passive investing C. Market efficiency D. Market timing

Q: The risk-free rate, average returns, standard deviations, and betas for three funds and the S&P 500 are given below. Based on the M2 measure, portfolio C has a superior return of _____ as compared to the S&P 500. A. -1.33%B. 1.43%C. 2%D. 0%

Q: The risk-free rate, average returns, standard deviations, and betas for three funds and the S&P 500 are given below. If these portfolios are subcomponents that make up part of a well-diversified portfolio, then portfolio ______ is preferred. A. AB. BC. CD. S&P 500

Q: The risk-free rate, average returns, standard deviations, and betas for three funds and the S&P 500 are given below. What is the M2 measure for portfolio B? A. .43%B. 1.25%C. 1.77%D. 1.43%

Q: The risk-free rate, average returns, standard deviations, and betas for three funds and the S&P 500 are given below. What is the Treynor measure for portfolio A? A. 12.38%B. 2.38%C. .91%D. 3.64%

Q: Which model is preferred by academics, and is gaining in popularity with practitioners, when evaluating investment performance? A. The Treynor-Black model B. The single-index model C. The Fama-French three-factor model D. The Sharpe model

Q: Suppose that over the same time period two portfolios have the same average return and the same standard deviation of return, but portfolio A has a higher beta than portfolio B. According to the Sharpe ratio, the performance of portfolio A __________. A. is better than the performance of portfolio B B. is the same as the performance of portfolio B C. is poorer than the performance of portfolio B D. cannot be measured since there is no data on the alpha of the portfolio

Q: Consider the theory of active portfolio management. Stocks A and B have the same beta and the same positive alpha. Stock A has higher nonsystematic risk than stock B. You should want __________ in your active portfolio. A. equal proportions of stocks A and B B. more of stock A than stock B C. more of stock B than stock A D. The answer cannot be determined from the information given.

Q: Consider the Sharpe and Treynor performance measures. When a pension fund is large and well diversified in total and it has many managers, the __________ measure is better for evaluating individual managers while the __________ measure is better for evaluating the manager of a small fund with only one manager responsible for all investments, which may not be fully diversified. A. Sharpe; Sharpe B. Sharpe; Treynor C. Treynor; Sharpe D. Treynor; Treynor

Q: Your return will generally be higher using the __________ if you time your transactions poorly, and your return will generally be higher using the __________ if you time your transactions well. A. dollar-weighted return method; dollar-weighted return method B. dollar-weighted return method; time-weighted return method C. time-weighted return method; dollar-weighted return method D. time-weighted return method; time-weighted return method

Q: A managed portfolio has a standard deviation equal to 22% and a beta of .9 when the market portfolio's standard deviation is 26%. The adjusted portfolio P* needed to calculate the M2 measure will have ________ invested in the managed portfolio and the rest in T-bills. A. 84.6% B. 118% C. 18% D. 15.4%

Q: The M2 measure is a variant of ________________. A. the Sharpe measure B. the Treynor measure C. Jensen's alpha D. the appraisal ratio

Q: Which one of the following performance measures is the Sharpe ratio? A. Average excess return to beta ratio B. Average excess return to standard deviation ratio C. Alpha to standard deviation of residuals ratio D. Average return minus required return

Q: The comparison universe is __________. A. the bogey portfolio B. a set of mutual funds with similar risk characteristics to your mutual fund C. the set of all mutual funds in the United States D. the set of all mutual funds in the world

Q: A mutual fund with a beta of 1.1 has outperformed the S&P 500 over the last 20 years. We know that this mutual fund manager _____. A. must have had superior stock selection ability. B. must have had superior asset allocation ability. C. must have had superior timing ability. D. may or may not have outperformed the S&P 500 on a risk-adjusted basis.

Q: The Treynor-Black model combines an actively managed portfolio with an efficiently diversified portfolio in order to: I. Improve the diversification of the overall portfolio II. Improve the overall portfolio's Sharpe ratio III. Reach a higher CAL than would otherwise be possible A. I only B. I and II only C. II and III only D. I, II, and III

Q: For a market timer, the _____________ will be higher when RM is higher. A. portfolio's alpha and beta B. portfolio's unsystematic risk C. portfolio's beta and slope of the characteristic line D. security selection component of the portfolio

Q: A fund has excess performance of 1.5%. In looking at the fund's investment breakdown, you see that the fund overweighted equities relative to the benchmark and that the average return on the fund's equity portfolio was slightly lower than the equity benchmark return. The excess performance for this fund is probably due to _______________. A. security selection ability B. better sector weightings in the equity portfolio C. the asset allocation decision D. finding securities with positive alphas

Q: What is the term for the process used to assess portfolio manager performance? A. Active analysis B. Attribution analysis C. Passive analysis D. Treynor-Black Analysis

Q: What phrase might be used as a substitute for the Treynor-Black model developed in 1973? A. Solely active management B. Enhanced index approach C. Passive management D. Random selection

Q: Which of the following investment strategies would have produced the highest returns in the time period since 1926? A. T-bills portfolio B. S&P 500 Index fund C. Perfect market timing D. Random stock selection

Q: An attribution analysis will not likely contain which of the following components? A. Asset allocation B. Index returns C. Risk-free returns D. Security selection

Q: The portfolio that contains the benchmark asset allocation against which a manager will be measured is often called _____________. A. the bogey portfolio B. the Vanguard Index C. Jensen's alpha D. the Treynor measure

Q: The Student Loan Marketing Association (SLMA) has short-term student loans funded by long-term debt. To hedge out this interest rate risk, SLMA could:I. Engage in a swap to pay fixed and receive variable interest paymentsII. Engage in a swap to pay variable and receive fixed interest paymentsIII. Buy T-bond futuresIV. Sell T-bond futures A. I and II onlyB. I and IV onlyC. II and III onlyD. II and IV only

Q: A market timer now believes that the economy will soften over the rest of the year as the housing market slump continues, and she also believes that foreign investors will stop buying U.S. fixed-income securities in the large quantities that they have in the past. One way the timer could take advantage of this forecast is to ________________. A. buy T-bond futures and sell stock-index futures B. sell T-bond futures and buy stock-index futures C. buy stock-index futures and buy T-bond futures D. sell stock-index futures and sell T-bond futures

Q: A bank has made long-term fixed-rate mortgages and has financed them with short-term deposits. To hedge out its interest rate risk, the bank could ________. A. sell T-bond futures B. buy T-bond futures C. buy stock-index futures D. sell stock-index futures

Q: A farmer sells futures contracts at a price of $2.75 per bushel. The spot price of corn is $2.55 at contract expiration. The farmer harvested 12,500 bushels of corn and sold futures contracts on 10,000 bushels of corn. Ignoring the transaction costs, how much did the farmer improve his cash flow by hedging sales with the futures contracts? A. $0 B. $2,000 C. $31,875 D. $33,875

Q: A farmer sells futures contracts at a price of $2.75 per bushel. The spot price of corn is $2.55 at contract expiration. The farmer harvested 12,500 bushels of corn and sold futures contracts on 10,000 bushels of corn. What are the farmer's proceeds from the sale of corn? A. $27,500 B. $31,875 C. $33,875 D. $35,950

Q: A corporation will be issuing bonds in 6 months, and the treasurer is concerned about unfavorable interest rate moves in the interim. The best way for her to hedge the risk is to _________________. A. buy T-bond futures B. sell T-bond futures C. buy stock-index futures D. sell stock-index futures

Q: The price of a corn futures contract is $2.65 per bushel when the contract is issued, and the commodity spot price is $2.55. When the contract expires, the two prices are identical. What principle is represented by this price behavior? A. Convergence B. Margin C. Basis D. Volatility

Q: You own a $15 million bond portfolio with a modified duration of 11 years. Interest rates are expected to increase by 5 basis points, or .05%. What is the price value of a basis point? A. $10,400 B. $14,300 C. $16,500 D. $21,300

Q: You purchase an interest rate futures contract that has an initial margin requirement of 15% and a futures price of $115,098. The contract has a $100,000 underlying par value bond. If the futures price falls to $108,000, you will experience a ______ loss on your money invested. A. 31% B. 41% C. 52% D. 64%

Q: The use of leverage is practiced in the futures markets due to the existence of _________. A. banks B. brokers C. clearinghouses D. margin

Q: The ________ and the _______ have the lowest correlations with the large-cap indexes. A. Nasdaq Composite; Russell 2000 B. NYSE; DJIA C. S&P 500; DJIA D. Russell 2000; S&P 500

Q: The _________ contract dominates trading in stock-index futures. A. S&P 500 B. DJIA C. Nasdaq 100 D. Russell 2000

Q: From the perspective of determining profit and loss, the long futures position most closely resembles a levered investment in a ____________. A. long call B. short call C. short stock position D. long stock position

Q: Interest rate swaps involve the exchange of ________________. A. actual fixed-rate bonds for actual floating-rate bonds B. actual floating-rate bonds for actual fixed-rate bonds C. net interest payments and an actual principal swap D. net interest payments based on notional principal, but no exchange of principal

Q: Sahali Trading Company has issued $100 million worth of long-term bonds at a fixed rate of 9%. Sahali Trading Company then enters into an interest rate swap where it will pay LIBOR and receive a fixed 8% on a notional principal of $100 million. After all these transactions are considered, Sahali's cost of funds is __________. A. 17% B. LIBOR C. LIBOR + 1% D. LIBOR - 1%

Q: If the risk-free rate is greater than the dividend yield, then we know that _______________. A. the futures price will be higher as contract maturity increases B. F0 < S0 C. FT > ST D. arbitrage profits are possible

Q: The volume of interest rate swaps increased from almost zero in 1980 to over __________ today. A. $40 million B. $400 million C. $400 billion D. $400 trillion

Q: On Monday morning you sell one June T-bond futures contract at 97:27, that is, for $97,843.75. The contract's face value is $100,000. The initial margin requirement is $2,700, and the maintenance margin requirement is $2,000 per contract. Use the following price data to answer the following questions. The cumulative rate of return on your investment after Wednesday is a ____. A. 79.9% lossB. 2.6% lossC. 33% gainD. 53.9% loss