Q&A Hero

Q: Explain a key advantage and a key disadvantage of Jensen's alpha.

Q: Explain the similarities and differences between the Sharpe and Treynor ratios. Also, explain the most appropriate application for each.

Q: High Mountain Homes has an expected annual return of 16.1 percent and a standard deviation of 20.3 percent. What is the smallest expected loss over the next month given a probability of 2.5 percent?A. -6.64 percentB. -8.67 percentC. -10.14 percentD. -12.12 percentE. -15.13 percent

Q: A portfolio has an expected annual return of 15.7 percent and a standard deviation of 19.6 percent. What is the smallest expected loss over the next calendar quarter given a probability of 1 percent? A. -15.11 percent B. -16.23 percent C. -16.49 percent D. -18.08 percent E. -18.87 percent

Q: Trailer Co. stock has an expected return of 12.2 percent and a standard deviation of 11.8 percent. What is the smallest expected loss over the next month given a probability of 5 percent? A. -4.59 percent B. -6.09 percent C. -7.27 percent D. -11.49 percent E. -13.77 percent

Q: A stock has an annual standard deviation of 14.1 percent and an expected annual return of 11.5 percent. What is the smallest expected loss for the next 6 months given a probability of 2.5 percent? A. -8.90 percent B. -13.79 percent C. -14.57 percent D. -15.38 percent E. -16.67 percent

Q: A portfolio has a 3-year standard deviation of 18.1 percent. What is the one-year standard deviation? A. 6.39 percent B. 8.69 percent C. 10.45 percent D. 11.80 percent E. 12.33 percent

Q: Your portfolio has a standard deviation of 11.7 percent. What is the two-year standard deviation? A. 14.87 percent B. 15.80 percent C. 16.55 percent D. 23.40 percent E. 24.15 percent

Q: The one-year standard deviation of your portfolio is 14.8 percent. What is the two-year standard deviation? A. 16.47 percent B. 18.23 percent C. 20.93 percent D. 25.41 percent E. 27.20 percent

Q: Mike's portfolio has a two-year expected return of 21.70 percent. What is the expected return for one year? A. 10.85 percent B. 12.50 percent C. 13.33 percent D. 14.22 percent E. 15.34 percent

Q: Angie owns a portfolio which has an expected annual return of 11.70 percent. What is the two-year expected return on her portfolio? A. 13.80 percent B. 19.52 percent C. 23.40 percent D. 27.60 percent E. 29.10 percent

Q: Your portfolio has an expected annual return of 11.6 percent. What is the two-year expected return? A. 11.60 percent B. 14.65 percent C. 16.40 percent D. 21.60 percent E. 23.20 percent

Q: You have a portfolio which has an average return of 10.3 percent. In any given year, you have a 2.5 percent probability of earning either a zero or a negative annual return. What is the approximate standard deviation of your portfolio?A. 5.26 percentB. 6.43 percentC. 6.94 percentD. 7.60 percentE. 8.14 percent

Q: Lester has a portfolio with an average return of 12.8 percent and a standard deviation of 9.1 percent. He has a one percent probability of losing _____ percent or more in any given year.A. -33.97B. -38.87C. -20.67D. -5.04E. -8.37

Q: Your portfolio has a standard deviation of 12.3 percent and an average return of 9.6 percent. You have a 5 percent probability of losing _____ percent or more in any given year.A. -33.79B. -31.54C. -12.59D. -10.63E. -3.34

Q: A portfolio has a standard deviation of 15.8 percent and an average return of 14.2 percent. What loss is associated with a 2.5 percent probability?A. -12.03 percentB. -14.87 percentC. -16.77 percentD. -17.38 percentE. -19.36 percent

Q: A portfolio has an average return of 14.2 percent and a standard deviation of 14.5 percent. Given this, you should expect to lose at least _____ percent on an annual basis once every century.A. -19.53B. -17.24C. -15.68D. -1.710E. -1.550

Q: The Miller Fund's correlation with the market is .648. What percentage of the fund's movement can be explained by movements in the overall market? A. 35 percent B. 42 percent C. 51 percent D. 65 percent E. 71 percent

Q: A fund has an alpha of 0.73 percent and a tracking error of 4.9 percent. What is the fund's information ratio? A. 0.112 B. 0.135 C. 0.149 D. 0.208 E. 0.229

Q: A portfolio consists of the following two funds.What is the expected return on fund A?A. 12.0 percentB. 13.3 percentC. 13.7 percentD. 14.5 percentE. 15.7 percent

Q: A portfolio consists of the following two funds.What is the Sharpe ratio of the portfolio?A. 0.422B. 0.547C. 0.645D. 0.721E. 0.798

Q: A portfolio consists of the following two funds.What is the Sharpe ratio of the portfolio?A. .39B. .45C. .52D. .60E. .64

Q: A stock has a return of 16.9 percent, a standard deviation of 11.7 percent, and a beta of 1.50. The risk-free rate is 2.65 percent and the market risk premium is 8.45 percent. What is the Jensen-Treynor alpha of this stock?A. -1.37 percentB. -1.09 percentC. -0.48 percentD. 0.89 percentE. 1.05 percent

Q: A stock has a return of 16.18 percent and a beta of 1.47. The market return is 10.65 percent and the risk-free rate is 3.20 percent. What is the Jensen-Treynor alpha of this stock?A. -1.12 percentB. -0.17 percentC. 0.66 percentD. 1.38 percentE. 1.59 percent

Q: What is Jensen's alpha of a portfolio comprised of 45 percent portfolio A and 55 percent of portfolio B?The risk-free rate is 3.1 percent and the market risk premium is 6.8 percent.A. -1.25 percentB. 0.47 percentC. 1.08 percentD. 1.46 percentE. 2.04 percent

Q: What is the Treynor ratio of a portfolio comprised of 25 percent portfolio A, 35 percent portfolio B, and 40 percent portfolio C?The risk-free rate is 3.6 percent and the market risk premium is 8.2 percent.A. .054B. .062C. .070D. .081E. .102

Q: What is the Treynor ratio of a portfolio comprised of 45 percent portfolio A and 55 percent portfolio B?The risk-free rate is 3.12 percent and the market risk premium is 8.5 percent.A. .041B. .058C. .069D. .114E. .136

Q: A portfolio has a Jensen's alpha of 0.82 percent, a beta of 1.40, and a CAPM expected return of 13.7 percent. The risk-free rate is 2.5 percent. What is the actual return of the portfolio? A. 15.5 percent B. 16.1 percent C. 16.8 percent D. 19.6 percent E. 21.9 percent

Q: A portfolio has an actual return of 15.17 percent, a beta of .85, and a standard deviation of 7.2 percent. The market return is 13.4 percent and the risk-free rate is 2.8 percent. What is the portfolio's Jensen's alpha? A. 2.25 percent B. 2.51 percent C. 2.67 percent D. 3.36 percent E. 4.04 percent

Q: A diversified portfolio has a beta of 1.47 and a raw return of 14.28 percent. The market return is 11.74 percent and the market risk premium is 7.85 percent. What is Jensen's alpha of the portfolio? A. -1.15 percent B. -0.86 percent C. -0.29 percent D. 0.48 percent E. 0.62 percent

Q: The U.S. Treasury bill has a return of 2.84 percent while the S&P 500 is returning 10.84 percent. Your portfolio has an actual return of 14.76 percent and a beta of 1.31. What is the portfolio's Jensen's alpha? A. -0.47 percent B. -0.92 percent C. 1.37 percent D. 1.44 percent E. 1.57 percent

Q: A portfolio has a beta of 1.52 and an actual return of 13.7 percent. The risk-free rate is 2.7 percent and the market risk premium is 7.8 percent. What is the value of Jensen's alpha? A. -0.86 percent B. 1.01 percent C. 1.14 percent D. 1.23 percent E. 1.37 percent

Q: Your portfolio actually earned 6.2 percent for the year. You were expecting to earn 8.6 percent based on the CAPM formula. What is Jensen's alpha if the portfolio standard deviation is 12.1 percent and the beta is .93? A. -3.91 percent B. -3.40 percent C. -2.96 percent D. -2.40 percent E. -1.87 percent

Q: The U.S. Treasury bill is yielding 1.85 percent and the market has an expected return of 7.48 percent. What is the Treynor ratio of a correctly-valued portfolio that has a beta of 1.33 and a variance of .0045? A. .056 B. .064 C. .069 D. .082 E. .087

Q: A portfolio has a standard deviation of 14.1 percent, a beta of 1.30 and a Treynor ratio of .094. The risk-free rate is 3.2 percent. What is the portfolio's expected rate of return? A. 14.83 percent B. 15.25 percent C. 15.42 percent D. 16.41 percent E. 16.56 percent

Q: A portfolio has an average return of 9.7 percent, a standard deviation of 8.6 percent, and a beta of .72. The risk-free rate is 2.1 percent. What is the Treynor ratio? A. .098 B. .106 C. .121 D. .636 E. .884

Q: The U.S. Treasury bill is yielding 3.0 percent and the market has an expected return of 11.6 percent. What is the Treynor ratio of a correctly-valued portfolio that has a beta of 1.02, and a standard deviation of 12.2 percent? A. .074 B. .086 C. .102 D. .619 E. .628

Q: A portfolio has a variance of .027556, a beta of 1.54, and an expected return of 11.2 percent. What is the Treynor ratio if the expected risk-free rate is 2.7 percent? A. .055 B. .063 C. .367 D. .498 E. .512

Q: A portfolio has a Treynor ratio of .070, a standard deviation of 16.40 percent, a beta of 1.16, and an expected return of 14.3 percent. What is the risk-free rate? A. 1.32 percent B. 5.21 percent C. 5.39 percent D. 6.18 percent E. 6.41 percent

Q: A portfolio has an expected return of 13.8 percent, a beta of 1.14, and a standard deviation of 12.7 percent. The U.S. Treasury bill rate is 3.2 percent. What is the Treynor ratio? A. .093 B. .138 C. .146 D. .835 E. .951

Q: Your portfolio has a beta of 1.17, a standard deviation of 14.3 percent, and an expected return of 12.5 percent. The market return is 11.3 percent and the risk-free rate is 3.1 percent. What is the Treynor ratio? A. .015 B. .080 C. .109 D. .482 E. .510

Q: A portfolio has a beta of 1.16, a standard deviation of 12.2 percent, and an expected return of 11.55 percent. The market return is 10.4 percent and the risk-free rate is 3.2 percent. What is the portfolio's Sharpe ratio? A. .57 B. .68 C. .73 D. .77 E. .85

Q: Your portfolio has an expected return of 14.2 percent, a beta of 1.31, and a standard deviation of 15.3 percent. The U.S. Treasury bill rate is 3.48 percent. What is the Sharpe ratio of your portfolio? A. .65 B. .67 C. .70 D. .77 E. .83

Q: A portfolio has a Sharpe ratio of .80, a standard deviation of 17.4 percent, and an expected return of 15.9 percent. What is the risk-free rate? A. 1.98 percent B. 2.36 percent C. 2.48 percent D. 3.09 percent E. 3.15 percent

Q: A portfolio has a variance of .0165, a beta of 1.05, and an expected return of 12.65 percent. What is the Sharpe ratio if the expected risk-free rate is 3.4 percent? A. .66 B. .70 C. .72 D. .82 E. .86

Q: A portfolio has a beta of 1.23 and a standard deviation of 11.6 percent. What is the Sharpe ratio if the market return is 12.4 percent and the market risk premium is 7.9 percent? A. .07 B. .11 C. .65 D. .84 E. .90

Q: The U.S. Treasury bill is yielding 2.25 percent and the market has an expected return of 9.8 percent. What is the Sharpe ratio of a portfolio that has a beta of 1.32 and a variance of .027556? A. .55 B. .60 C. .69 D. .74 E. .82

Q: A portfolio has a beta of 1.26, a standard deviation of 15.9 percent, and an average return of 15.07 percent. The market rate is 12.7 percent and the risk-free rate is 3.6 percent. What is the Sharpe ratio? A. .61 B. .68 C. .72 D. .84 E. .88

Q: A portfolio has an average return of 12.4 percent, a standard deviation of 15.8 percent, and a beta of 1.35. The risk-free rate is 2.6 percent. What is the Sharpe ratio? A. .49 B. .52 C. .62 D. .71 E. .75

Q: A portfolio has a 2.5 percent chance of losing 16 percent or more according to the VaR when T = 1. This can be interpreted to mean that the portfolio is expected to have an annual loss of 16 percent or more once in every how many years? A. 1.0 B. 2.5 C. 25 D. 40 E. 100

Q: Which one of the following correctly states the VaR for a 3-year period with a 2.5 percent probability?A. Prob[Rp,T E(Rp) 3 - 1.645 p 3]B. Prob[Rp,T E(Rp) 3 - 1.645 p 3]C. Prob[Rp,T E(Rp) 3 - 1.645 p 3]D. Prob[Rp,T E(Rp) 3 - 1.960 p 3]E. Prob[Rp,T E(Rp) 3 - 1.960 p 3]

Q: You have computed the expected return using VaR with a 2.5 percent probability for a one-year period of time. How would this expected return be expressed on a normal distribution curve? A. lower tail starting at the point that is 2.5 standard deviations below the mean B. lower tail of a 95 percent probability range C. the point that corresponds to 2.5 standard deviations below the mean D. the point that represents the lower end of the 90 percent probability range E. the negative range that lies within 2.5 standard deviations of the mean

Q: Which of the following are related to VaR analysis? I. beta II. standard deviation III. expected return IV. time A. I and III only B. II and IV only C. I, III, and IV only D. II, III, and IV only E. I, II, III, and IV

Q: Which one of the following statements is true concerning VaR? A. VaR ignores time. B. VaR only applies to time periods of one year. C. VaR applies only to time periods equal to or greater than one year. D. VaR values can be computed for monthly time periods. E. VaR is accurate only for time periods less than one year.

Q: Which one of the following Value-at-Risk measures would be most appropriate for a portfolio designed for a very risk-adverse investor?A. Prob (Rp - .20) = 100%B. Prob (Rp - .15) = 50%C. Prob (Rp - .10) = 25%D. Prob (Rp - .10) = 10%E. Prob (Rp - .05) = 1%

Q: The Value-at-Risk measure assumes which one of the following? A. returns are normally distributed B. portfolios lie on the efficient frontier C. all portfolios are fully diversified D. returns tend to follow repetitive patterns E. the risk premium is constant over time

Q: Which one of the following is the best interpretation of this VaR statistic: Prob (Rp ≤ -.15) = 37%? A. If your portfolio declines by 15 percent or more, that decline is expected to be followed by a 37 percent increase in value. B. Your portfolio is expected to lose at least 15 percent, but not more than 37 percent in any given year. C. There is a 37 percent chance that your portfolio will decline in value by at least 15 percent over the next year. D. Sometime in the future, your portfolio is expected to lose 15 percent or more in a single year, but have an overall average rate of return of 37 percent. E. There is a 37 percent chance that your portfolio will lose at least 15 percent of its value over the next 10 years.

Q: Which one of the following is the primary purpose of the Value-at-Risk computation? A. determine the 99 percent probability range given an abnormal distribution B. evaluate the risk-return tradeoff for a given mix of securities C. evaluate the probability of a significant loss D. determine the portfolio that maximizes the risk premium per unit of total risk E. determine the portfolio that maximizes the excess return per unit of systematic risk

Q: Which metric describes the percentage of a fund's movement which can be explained by movements in the market? A. Jensen's alpha B. Information ratio C. Tracking error D. R Squared E. Treynor ratio

Q: Which metric measures how volatile a fund's returns are relative to its benchmark? A. Jensen's alpha B. Information ratio C. Tracking error D. Sharpe ratio E. Treynor ratio

Q: Which measure would you use to know whether alpha is truly significant or just the result of random chance? A. Jensen's alpha B. Information ratio C. Jensen-Treynor alpha D. Sharpe ratio E. Treynor ratio

Q: You want to create the best portfolio that can be derived from two assets. Which one of the following will help you identify that portfolio? A. highest portfolio beta B. market equivalent level of risk C. highest possible rate of return D. Treynor-minimal portfolio E. Sharpe-optimal portfolio

Q: A Sharpe-optimal portfolio provides which one of the following for a given set of securities? A. Jensen's Alpha B. highest possible level of risk C. highest level of return for a market-equivalent level of risk D. highest excess return per unit of systematic risk E. highest risk premium per unit of total risk

Q: The Sharpe-optimal portfolio will be the investment opportunity set which lies on a straight line that has which of the following characteristics? A. the flattest slope when the line intersects the vertical axis at the risk-free rate B. the steepest slope when the line intersects the vertical axis at the risk-free rate C. the steepest slope when the line intersects the vertical axis at the origin D. the flattest slope when the line intersects the vertical axis at the market rate E. the steepest slope when the line intersects the vertical axis at the market rate

Q: Which one of the following is measured by the Jensen-Treynor alpha? A. total return relative to systematic risk B. risk premium relative to systematic C. risk premium relative to total risk D. excess return relative to systematic risk E. excess return relative to total risk

Q: The Jensen-Treynor alpha is equal to: A. the Treynor ratio divided by Jensen's alpha. B. the Treynor ratio multiplied by Jensen's alpha. C. Jensen's alpha divided by beta. D. Jensen's alpha divided by the standard deviation. E. Jensen's alpha divided by the Treynor ratio.

Q: Which of the following measures should be used to determine if a security should be included in a master portfolio? I. Sharpe ratio II. Treynor ratio III. Jensen's alpha A. I only B. II only C. III only D. I and II only E. II and III only

Q: Which one of the following is probably the best measure of the performance of a well-diversified portfolio? A. Jensen's alpha B. Value at Risk C. Jensen-Treynor alpha D. Sharpe ratio E. Treynor ratio

Q: Which of the following measures are dependent upon the accuracy of a security's beta? I. Sharpe ratio II. Treynor ratio III. Jensen's alpha A. I only B. II only C. I and II only D. II and III only E. I, II, and III

Q: Which of the following should generally only be used to evaluate relatively diversified portfolios rather than individual securities? I. Sharpe ratio II. Treynor ratio III. Jensen's alpha A. I only B. II only C. III only D. I and II only E. I, II, and III

Q: Tony brags that his portfolio's rate of return is "beating the market". Which one of the following would best substantiate his claim? A. positive Sharpe ratio B. negative Treynor ratio C. positive Jensen's alpha D. zero Value at Risk E. beta greater than 1.0

Q: Which one of the following is the best indication that a security is correctly priced according to the Capital Asset Pricing Model? A. beta of zero B. beta of 1.0 C. alpha of zero D. alpha of 1.0 E. alpha of -1.0

Q: Which one of the following statements is correct in relation to a security that has a negative Jensen's alpha?A. The security is overpriced and will plot below the security market line.B. The security is overpriced and will plot above the security market line.C. The security is underpriced and will plot below the security market line.D. The security is underpriced and will plot above the security market line.E. The security is incorrectly priced but you cannot tell if it is underpriced or overpriced based on the information provided.

Q: You are considering the purchase of a mutual fund. You have found three funds that meet your basic criteria. Each fund has a different alpha. Which alpha indicates the preferred investment? A. the most negative alpha B. the least negative alpha C. the zero alpha D. the lowest positive alpha E. the highest positive alpha

Q: You are comparing three assets which have differing Treynor ratios. Given this, which one of the following must be true? A. The assets may all be correctly priced if they have differing betas. B. The assets have differing rates of return. C. The assets have differing levels of market risk but equal amounts of total risk. D. The assets are all mispriced according to CAPM. E. The preferred investment is the asset with the highest Treynor ratio.

Q: You are comparing three securities and discover they all have identical Treynor ratios. Given this information, which one of the following must be true regarding these three securities? A. They have identical betas. B. They have the same rates of return. C. They earn identical rewards per unit of total risk. D. They earn identical rewards per unit of systematic risk. E. They have identical Sharpe ratios also.

Q: Which one of the following measures risk premium in relation to systematic risk? A. Value at Risk B. Jensen's alpha C. beta D. Sharpe ratio E. Treynor ratio

Q: Which one of the following values would be the most preferable as a Sharpe ratio? A. -1.11 B. -0.89 C. 0.00 D. .10 E. 1.02

Q: Which one of the following measures returns in relation to total risk? A. Treynor ratio B. Sharpe ratio C. Jensen's alpha D. Value at Risk E. beta

Q: The Sharpe ratio is best used to evaluate which one of the following? A. corporate bonds B. government bonds C. Treasury bills D. individual stocks E. diversified portfolios