Chap 018

Chapter 18 - Portfolio Performance Evaluation
Chapter 18
Portfolio Performance Evaluation

Multiple Choice Questions

1. A mutual fund with a beta of 1.1 has outperformed the S&P5 over the last ! "ears. #e
$now that this mutual fund mana%er &&&&&&&&&&&&&&&&&&&&&&&.
A. must have had superior stoc$ selection abilit"
'. must have had superior asset allocation abilit"
C. must have had superior timin% abilit"
(. ma" or ma" not have outperformed the S&P5 on a ris$ ad)usted basis

!. *he comparison universe is &&&&&&&&&&.
A. the bo%e" portfolio
'. a set of mutual funds with similar ris$ characteristics to "our mutual fund
C. the set of all mutual funds in the +.S.A.
(. the set of all mutual funds in the world

,. #hich one of the followin% performance measures is the Sharpe measure-
A. Avera%e e.cess return to beta ratio
'. Avera%e e.cess return to standard deviation ratio
C. Alpha to standard deviation of residuals ratio
(. Avera%e return minus re/uired return

0. *he 1
!
measure is a variant of &&&&&&&&&&&&&&&&.
A. the Sharpe measure
'. the *re"nor measure
C. 2ensen3s alpha
(. the appraisal ratio

18-1
5. A mana%ed portfolio has a standard deviation e/ual to !!4 and a beta of .5 when the
mar$et portfolio3s standard deviation is !64. *he ad)usted portfolio P7 needed to calculate the
1
!
measure will have &&&&&&&& invested in the mana%ed portfolio and the rest in *-bills.
A. 80.64
'. 1184
C. 184
(. 15.04

6. 8our return will %enerall" be hi%her usin% the &&&&&&&&&& if "ou time "our transactions
poorl" and "our return will %enerall" be hi%her usin% the &&&&&&&&&& if "ou time "our
transactions well.
A. dollar-wei%hted return method9 dollar-wei%hted return method
'. dollar-wei%hted return method9 time-wei%hted return method
C. time-wei%hted return method9 dollar-wei%hted return method
(. time-wei%hted return method9 time-wei%hted return method

:. Consider the Sharpe and *re"nor performance measures. #hen a pension fund is lar%e and
well diversified in total and it has man" mana%ers; the &&&&&&&&&& measure is better for
evaluatin% individual mana%ers while the &&&&&&&&&& measure is better for evaluatin% the
mana%er of a small fund with onl" one mana%er responsible for all investments that ma" not
be full" diversified.
A. Sharpe9 Sharpe
'. Sharpe9 *re"nor
C. *re"nor9 Sharpe
(. *re"nor9 *re"nor

8. <enri$sson found that; on avera%e; betas of funds &&&&&&&&&& durin% mar$et advances.
A. decreased sli%htl"
'. decreased ver" si%nificantl"
C. increased sli%htl"
(. increased ver" si%nificantl"

18-!
5. Suppose that over the same time period two portfolios have the same avera%e return and the
same standard deviation of return; but portfolio A has a hi%her beta than portfolio '.
Accordin% to the Sharpe measure; the performance of portfolio A &&&&&&&&&&.
A. is better than the performance of portfolio '
'. is the same as the performance of portfolio '
C. is poorer than the performance of portfolio '
(. cannot be measured since there is no data on the alpha of the portfolio

1. 1ost professionall" mana%ed e/uit" funds &&&&&&&&&&.
A. outperform the S&P 5 inde. on both raw and ris$-ad)usted return measures
'. outperform the S&P 5 inde. on raw return measures and underperform the S&P 5
inde. on ris$-ad)usted return measures
C. underperform the S&P 5 inde. on both raw and ris$-ad)usted return measures
(. underperform the S&P 5 inde. on raw return measures and outperform the S&P 5

*he ris$ free rate; avera%e returns; standard deviations and betas for three funds and the
S&P5 are %iven below.

11. #hat is the *
!
measure for portfolio A-
A. 1!.04
'. !.,84
C. .514
(. ,.604

18-,
1!. #hat is the 1
!
measure for portfolio '-
A. .0,4
'. 1.!54
C. 1.::4
(. 1.0,4

1,. =f these portfolios are subcomponents which ma$e up part of a well diversified portfolio
then portfolio &&&&&& is preferred.
A. A
'. '
C. C
(. S&P5

10. 'ased on the 1
!
measure; portfolio C has a superior return of &&&&& as compared to the
S&P5.
A. -1.,,4
'. 1.0,4
C. !.4
(. .4

15. #hich one of the followin% is lar%el" based on forecasts of macroeconomic factors-
A. Securit" selection
'. Passive investin%
C. 1ar$et efficienc"
(. 1ar$et timin%

16. 'ased on the e.ample used in the boo$; a perfect mar$et timer would have made &&&&&&&
of dollars on a >1 investment between 15!6 and !8.
A. >1
'. >1;6!6
C. >1.5 million
(. >,6.: billion

18-0
*he avera%e returns; standard deviations and betas for three funds are %iven below alon% with
data for the S&P 5 inde.. *he ris$ free return durin% the sample period is 64.

1:. 8ou wish to evaluate the three mutual funds usin% the Sharpe measure for performance
evaluation. *he fund with the hi%hest Sharpe measure of performance is &&&&&&&&&&.
A. ?und A
'. ?und '
C. ?und C
(. indeterminable

18. 8ou wish to evaluate the three mutual funds usin% the *re"nor measure for performance
evaluation. *he fund with the hi%hest *re"nor measure of performance is &&&&&&&&&&.
A. ?und A
'. ?und '
C. ?und C
(. indeterminable

15. 8ou wish to evaluate the three mutual funds usin% the 2ensen measure for performance
evaluation. *he fund with the hi%hest 2ensen measure of performance is &&&&&&&&&&.
A. ?und A
'. ?und '
C. ?und C
(. S&P5

18-5
=n a particular "ear; Salmon Arm 1utual ?und earned a return of 164 b" ma$in% the
followin% investments in asset classes@

*he return on a bo%e" portfolio was 1!4 calculated as follows@

!. *he total e.cess return on the mana%ed portfolio was &&&&&&&&&&.
A. !4
'. ,4
C. 04
(. 54

!1. *he contribution of asset allocation across mar$ets to the total e.cess return was
&&&&&&&&&&.
A. 1.54
'. !.4
C. !.54
(. ,.54

!!. *he contribution of securit" selection within asset classes to the total e.cess return was
&&&&&&&&&&.
A. 1.54
'. !.4
C. !.54
(. ,.54

18-6
=n a particular "ear; Aost <ope 1utual ?und made the followin% investments in asset classes@

!,. *he total e.tra return on the mana%ed portfolio was &&&&&&&&&&.
A. 14
'. !4
C. ,4
(. 04

!0. *he contribution of asset allocation across mar$ets to the total e.tra return was
&&&&&&&&&&.
A. -14
'. 4
C. 14
(. !4

!5. *he contribution of securit" selection within asset classes to the total e.tra return was
&&&&&&&&&&.
A. -14
'. 4
C. 14
(. !4

18-:
!6. #hich one of the followin% avera%in% methods is the preferred method of constructin%
returns series for use in evaluatin% portfolio performance-
A. Beometric avera%e
'. Arithmetic avera%e
C. (ollar-wei%hted
(. =nternal

!:. *he &&&&&&&&&& calculates the reward to ris$ trade-off b" dividin% the avera%e portfolio
e.cess return b" the portfolio beta.
A. Sharpe measure
'. *re"nor measure
C. 2ensen measure
(. appraisal ratio

!8. =n creatin% the *
!
measure one mi.es P7 and *-bills to match the &&&&& of the mar$et and
in creatin% the 1
!
measure one mi.es P7 and *-bills to match the &&&&& of the mar$et.
A. alpha9 beta
'. beta9 alpha
C. beta9 standard deviation
(. standard deviation9 beta

!5. *he 1
!
measure of portfolio performance was developed b" &&&&&&&&&&&&&&.
A. 1odi%liani and *re"nor
'. 1odi%liani and 1odi%liani
C. 1erton and 1iller
(. ?ama and ?rench

,. Probabl" the bi%%est problem with evaluatin% portfolio performance of activel" mana%ed
funds is the assumption that &&&&&&&&&&&&&&&&&&&&&&&&&&.
A. the mar$ets are efficient
'. portfolio ris$ is constant over time
C. diversification pa"s off
(. securit" selection is more valuable than asset allocation

18-8
,1. Perfect timin% abilit" is e/uivalent to havin% &&&&&&&&&& on the mar$et portfolio.
A. a call option
'. a futures contract
C. a put option
(. a forward contract

,!. Cne hundred fund mana%ers enter a contest to see how man" times in thirteen "ears the"
can earn a hi%her return than their competitors. *he probabilit" distribution of the number of
successful "ears out of thirteen for the best performin% mone" mana%ers is

Cut of this sample; chance alone would indicate that there is a &&&&&& probabilit" that
someone would beat the mar$et at least 11 times out of 1, "ears.
A. 51.,4
'. 65.54
C. 6:.14
(. 1.8,4

,,. *he *re"nor-'lac$ model is a model that shows how an investment mana%er can use
securit" anal"sis and statistics to construct &&&&&&&&&&.
A. a mar$et portfolio
'. a passive portfolio
C. an active portfolio
(. an inde. portfolio

18-5
,0. =f an investor is a successful mar$et timer; his distribution of monthl" portfolio returns
will &&&&&&&&&&.
A. be s$ewed to the left
'. be s$ewed to the ri%ht
C. e.hibit $urtosis
(. e.hibit neither s$ewness nor $urtosis

,5. Decent anal"sis indicates that the st"le of investin% is a critical component of fund
performance. =n fact on avera%e about &&&&& of fund performance is attributable to the asset
allocation decision.
A. 684
'. :04
C. 884
(. 5:4

,6. =n the *re"nor-'lac$ model; the active portfolio will contain stoc$s with &&&&&&&&&&.
A. alphas e/ual to Eero
'. ne%ative alphas
C. positive alphas
(. some ne%ative and some positive alphas

,:. Portfolio performance is often decomposed into various subcomponents such as the return
due to &&&&&&&&&&&.
=. broad asset allocation across securit" classes
==. sector wei%htin%s within e/uit" mar$ets
===. securit" selection with a %iven sector
*he one decision that contributes most to the fund performance is
A. =
'. ==
C. ===
(. All contribute e/uall" to fund performance

18-1
,8. *he theor" of efficient frontiers has &&&&&&&&&&.
A. no adherents amon% practitioners
'. a small number of adherents amon% practitioners
C. a si%nificant number of adherents amon% practitioners
(. complete support b" practitioners

,5. =n the *re"nor-'lac$ model securit" anal"sts &&&&&&&&&&.
A. anal"Ee a relativel" small number of stoc$s
'. anal"Ee all stoc$s which are publicl" traded
C. are redundant
(. devote their attention to mar$et timin% rather than fundamental anal"sis

0. =n the *re"nor-'lac$ model securit" anal"sts &&&&&&&&&&.
A. anal"Ee the entire universe of stoc$s
'. assume that mar$ets are inefficient
C. treat mar$et inde. as a baseline portfolio upon which an active portfolio is constructed
(. focus on selectin% the best performin% bo%e"

01. Active portfolio mana%ement consists of &&&&&&&&&&.
=. mar$et timin%
==. securit" selection
===. sector selection within %iven mar$ets
=F. inde.in%
A. = and == onl"
'. == and === onl"
C. =; == and === onl"
(. =; ==; === and =F

0!. A mar$et timin% strate%" is one where asset allocation in the stoc$ mar$et &&&&&&&&&&
when one forecasts the stoc$ mar$et will outperform treasur" bills.
A. decreases
'. increases
C. remains the same
(. ma" increase or decrease

18-11
0,. =n the *re"nor-'lac$ model; the contribution of individual securit" to the active portfolio
should be based primaril" on the stoc$3s &&&&&&&&&.
A. alpha
'. beta
C. the residual variance
(. appraisal ratio

00. =f all &&& are &&& in the *re"nor-'lac$ model; there would be no reason to depart from the
passive portfolio.
A. alphas9 Eero
'. alphas9 positive
C. betas9 positive
(. standard deviations9 positive

05. =n the *re"nor-'lac$ model; the wei%ht of each anal"Eed securit" in the portfolio should
be proportional to its &&&&&&&&&&.
A. alphaGbeta
'. alphaGresidual variance
C. betaGresidual variance
(. none of the above

06. *he critical variable in the determination of the success of the active portfolio is the
stoc$3s &&&&&&&&&&.
A. alphaGnons"stematic ris$
'. alphaGs"stematic ris$
C. deltaGnons"stematic ris$
(. deltaGs"stematic ris$

18-1!
0:. Consider the theor" of active portfolio mana%ement. Stoc$s A and ' have the same
positive alpha and the same nons"stematic ris$. Stoc$ A has a hi%her beta than stoc$ '. 8ou
should want &&&&&&&&&& in "our active portfolio.
A. e/ual proportions of stoc$s A and '
'. more of stoc$ A than stoc$ '
C. more of stoc$ ' than stoc$ A
(. more information is needed to answer this /uestion

08. Consider the theor" of active portfolio mana%ement. Stoc$s A and ' have the same beta
and non-s"stematic ris$. Stoc$ A has hi%her positive alpha than stoc$ '. 8ou should want
&&&&&&&&&& in "our active portfolio.

05. *he mar$et timin% form of active portfolio mana%ement relies on &&&&&&&&&& forecastin%
and the securit" selection form of active portfolio mana%ement relies on &&&&&&&&&&
forecastin%.
A. macroeconomic9 macroeconomic
'. macroeconomic9 microeconomic
C. microeconomic9 macroeconomic
(. microeconomic9 microeconomic

5. Active portfolio mana%ers tr" to construct a ris$" portfolio with &&&&&&&.
A. a hi%her Sharpe measure than a passive strate%"
'. a lower Sharpe measure than a passive strate%"
C. the same Sharpe measure as a passive strate%"
(. ver" few securities

18-1,
51. =n performance measurement the bo%e" portfolio is desi%ned to &&&&&&&&&.
A. measure the returns to a completel" passive strate%"
'. measure the returns to a similar active strate%"
C. measure the returns to a %iven investment st"le
(. e/ual the return on the S&P5

5!. &&&&&&&&&& portfolio mana%erHsI e.perience strea$s of abnormal returns which are hard
to label as luc$" outcomes; and &&&& anomalies in realiEed returns have been sufficientl"
persistent such that portfolio mana%ers could use them to beat a passive strate%" over
prolon%ed periods.
A. Jo9 no
'. Jo9 some
C. Some9 no
(. Some9 some

5,. A passive benchmar$ portfolio is &&&&&&&&&&&&&&&.
=. a portfolio where the asset allocation across broad asset classes is neutral and not
determined b" forecasts of performance of the different asset classes
==. one where an inde.ed portfolio is held within each asset class
===. often called the bo%e"
A. = onl"
'. = and === onl"
C. == and === onl"
(. =; == and ===

50. *he correct measure of timin% abilit" is &&&&&&&&&&&& for a portfolio mana%er who
correctl" forecasts 554 of bull mar$ets and 554 of bear mar$ets.
A. -54
'. 54
C. 14
(. 554

18-10
55. =t is ver" hard to statisticall" verif" abnormal fund performance because of all e.cept
which one of the followin%-
A. =nevitabl" some fund mana%ers e.perience strea$s of %ood performance that ma" )ust be
due to luc$
'. *he noise in realiEed rates of return is so lar%e as to ma$e it hard to identif" abnormal
performance in competitive mar$ets
C. Portfolio composition is rarel" stable lon% enou%h to identif" abnormal performance
(. Even if successful; there is reall" not much value to be added b" active strate%ies such as
mar$et timin%

56. Stoc$s A and ' have alphas of .1 and betas of .5. Stoc$ A has a residual variance of .
! while stoc$ ' has a residual variance of .16. =f stoc$ A represents !4 of an active
portfolio; stoc$ ' should represent &&&&&&&&&& of an active portfolio.
A. 1.64
'. !.4
C. !.!4
(. !.54

5:. Portfolio mana%ers Paul 1artin and Kevin Krue%er each mana%e >1;; funds. Paul
1artin has perfect foresi%ht and the call option value of his perfect foresi%ht is >15;.
Kevin Krue%er is an imperfect forecaster and correctl" predicts 54 of all bull mar$ets and
:4 of all bear mar$ets. *he correct measure of timin% abilit" for Kevin Krue%er is
&&&&&&&&&&.
A. !4
'. 64
C. :54
(. 1!4

18-15
58. Portfolio mana%ers Paul 1artin and Kevin Krue%er each mana%e >1;; funds. Paul
:4 of all bear mar$ets. *he value of Kevin Krue%er3s imperfect forecastin% abilit" is
&&&&&&&&&&.
A. >,;
'. >6:;5
C. >18;:5
(. >!1:;5

55. Chuc$ (ou%lass; an imperfect forecaster correctl" predicts 5:4 of all bull mar$ets and
684 of all bear mar$ets. Do" Simmonds is a perfect forecaster. =f Chuc$ (ou%lass is able to
char%e a fee of >1!5;; the fee that Do" Simmonds should char%e is &&&&&&&&&&. Assume
that both forecasters mana%e similar siEe funds.
A. >,1;!5
'. >!;
C. >5;
(. >6!5;

6. A mutual fund invests in lar%e-capitaliEation stoc$s. =ts performance should be measured
a%ainst which one of the followin%-
A. Dussell ! inde.
'. S&P 5 inde.
C. #ilshire 5 inde.
(. (ow 2ones =ndustrial Avera%e

61. Assume "ou purchased a rental propert" for >1; and sold it one "ear later for
>115; Hthere was no mort%a%e on the propert"I. At the time of the sale; "ou paid >,; in
commissions and >1; in ta.es. =f "ou received >1; in rental income Hall received at the
end of the "earI; what annual rate of return did "ou earn-
A. 64
'. 114
C. !4
(. !54

18-16
*he table presents the actual return of each sector of the mana%er3s portfolio in column H1I;
the fraction of the portfolio allocated to each sector in column H!I; the benchmar$ or neutral
sector allocations in column H,I; and the returns of sector inde.es in column 0.

6!. #hat was the mana%er3s return in the month-
A. !.:4
'. !.!14
C. !.!04
(. 0.84

6,. #hat was the bo%e"3s return in the month-
A. !.:4
'. !.!14
C. !.!04
(. 0.84

60. #hat was the mana%er3s over or under performance for the month-
A. +nder performance L .,4
'. Cver performance L .,4
C. Cver performance L .104
(. +nder performance L ,4

65. #hat is the contribution of securit" selection to relative performance-
A. -.154
'. .154
C. -.,4
(. .,4

18-1:
66. #hat is the contribution of asset allocation to relative performance-
A. -.184
'. .184
C. -.154
(. .154

6:. 1ornin%star3s DAD produce results which are similar but not identical to &&&&&&&&.
A. 2ensen3s alpha
'. 1
!
C. the *re"nor ratio
(. the Sharpe ratio

68. *he *re"nor-'lac$ 1odel assumes securit" mar$ets are &&&&&&&&&.
A. completel" efficient
'. nearl" efficient
C. ver" inefficient
(. random wal$s

65. *he appraisal ratio is e/ual to the stoc$3s &&&& divided b" its &&&&&&.
A. diversifiable ris$9 beta
'. beta9 alpha
C. alpha9 beta
(. alpha9 diversifiable ris$

:. Empirical tests to date show &&&&&&&&&&&&&&.
A. that man" investors have earned lar%e rewards b" mar$et timin%
'. little evidence of mar$et timin% abilit"
C. clear cut evidence of substantial mar$et timin% abilit"
(. evidence that absolutel" no mar$et timin% abilit" e.ists

18-18
:1. A portfolio %enerates an annual return of 1,4; a beta of .: and a standard deviation of
1:4. *he mar$et inde. return is 104 and has a standard deviation of !14. #hat is the 1
!

measure of the portfolio if the ris$ free rate is 54-
A. .584
'. .684
C. .:84
(. .884

:!. A portfolio %enerates an annual return of 1:4; a beta of 1.! and a standard deviation of
154. *he mar$et inde. return is 1!4 and has a standard deviation of 164. #hat is the 1
!

A. !.154
'. !.:64
C. !.504
(. ,.104

:,. A portfolio %enerates an annual return of 1,4; a beta of .: and a standard deviation of
1:4. *he mar$et inde. return is 104 and has a standard deviation of !14. #hat is the
*re"nor measure of the portfolio if the ris$ free rate is 54-
A. .110,
'. .1!,,
C. .1,50
(. .10::

:0. A portfolio %enerates an annual return of 164; a beta of 1.! and a standard deviation of
154. *he mar$et inde. return is 1!4 and has a standard deviation of 164. #hat is the
A. .8,,
'. .18,
C. .1110
(. .116,

18-15
Sharpe measure of the portfolio if the ris$ free rate is 54-
A. .,5:8
'. .0158
C. .056,
(. .0:6

A. .0:5:
'. .5!6,
C. .680!
(. .:!5!

::. A portfolio %enerates an annual return of 1,4; a beta of .: and a standard deviation of
1:4. *he mar$et inde. return is 104 and has a standard deviation of !14. #hat is 2ensen3s
alpha of the portfolio if the ris$ free rate is 54-
A. .1:
'. .,0
C. .6:
(. .:8

154. *he mar$et inde. return is 1!4 and has a standard deviation of 164. #hat is 2ensen3s
A. .1:
'. .!8
C. .,6
(. .:8

18-!
:5. *he portfolio that contains the benchmar$ asset allocation a%ainst which a mana%er will
be measured is often called &&&&&&&&&&&&&.
'. the Fan%uard =nde.
C. 2ensen3s alpha
(. the *re"nor measure

8. An attribution anal"sis will JC* li$el" contain which of the followin% components-
A. Asset allocation
'. =nde. returns
C. Dis$ free returns
(. Securit" selection

81. #hich of the followin% investment strate%ies would have produced the hi%hest returns in
the time period since 15!6-
A. * bills portfolio
'. S&P 5 inde. fund
C. Perfect mar$et timin%
(. Dandom stoc$ selection

8!. #hat phrase mi%ht be used as a substitute for the *re"nor-'lac$ model developed in
15:,-
A. Solel" active mana%ement
'. Enhanced inde. approach
C. Passive mana%ement
(. Dandom selection

8,. #hat is the term for the process used to assess portfolio mana%er performance-
A. Active anal"sis
'. Attribution anal"sis
C. Passive anal"sis
(. *re"nor 'lac$ Anal"sis

18-!1
80. A fund has e.cess performance of 1.54. =n loo$in% at the fund3s investment brea$down
"ou see that the fund overwei%hed e/uities relative to the benchmar$ and the avera%e return
on the fund3s e/uit" portfolio was sli%htl" lower than the e/uit" benchmar$ return. *he e.cess
performance for this fund is probabl" due to &&&&&&&&&&&&&&&.
A. securit" selection abilit"
'. better sector wei%htin%s in the e/uit" portfolio
C. the asset allocation decision
(. findin% securities with positive alphas

85. ?or a mar$et timer the &&&&&&&&&&&&& will be hi%her when D
1
is hi%her.
A. portfolio3s alpha and beta
'. portfolio3s uns"stematic ris$
C. portfolio3s beta and slope of the characteristic line
(. securit" selection component of the portfolio

86. *he *re"nor-'lac$ model combines an activel" mana%ed portfolio with an efficientl"
diversified portfolio in order to &&&&&&&&&&&&&&&&&&&&&&&.
=. improve the diversification of the overall portfolio
==. improve the overall portfolio3s Sharpe ratio
===. reach a hi%her CAA than otherwise would be possible
A. = onl"
'. = and == onl"
C. == and === onl"
(. =; == and ===

8:. Consider the theor" of active portfolio mana%ement. Stoc$s A and ' have the same beta
and the same positive alpha. Stoc$ A has hi%her nons"stematic ris$ than stoc$ '. 8ou should
want &&&&&&&&&& in "our active portfolio.

18-!!
Chapter 18 Portfolio Performance Evaluation Answer Ke"

Multiple Choice Questions

1. A mutual fund with a beta of 1.1 has outperformed the S&P5 over the last ! "ears. #e
$now that this mutual fund mana%er &&&&&&&&&&&&&&&&&&&&&&&.
A. must have had superior stoc$ selection abilit"
'. must have had superior asset allocation abilit"
C. must have had superior timin% abilit"
D. ma" or ma" not have outperformed the S&P5 on a ris$ ad)usted basis

Difficulty: Easy

!. *he comparison universe is &&&&&&&&&&.
B. a set of mutual funds with similar ris$ characteristics to "our mutual fund
C. the set of all mutual funds in the +.S.A.
(. the set of all mutual funds in the world

Difficulty: Easy

,. #hich one of the followin% performance measures is the Sharpe measure-
A. Avera%e e.cess return to beta ratio
B. Avera%e e.cess return to standard deviation ratio
C. Alpha to standard deviation of residuals ratio
(. Avera%e return minus re/uired return

Difficulty: Easy

18-!,
0. *he 1
!
measure is a variant of &&&&&&&&&&&&&&&&.
A. the Sharpe measure
'. the *re"nor measure
C. 2ensen3s alpha
(. the appraisal ratio

Difficulty: Easy

5. A mana%ed portfolio has a standard deviation e/ual to !!4 and a beta of .5 when the
mar$et portfolio3s standard deviation is !64. *he ad)usted portfolio P7 needed to calculate the
1
!
measure will have &&&&&&&& invested in the mana%ed portfolio and the rest in *-bills.
A. 80.64
B. 1184
C. 184
(. 15.04
!6G!! L 1184

Difficulty: Medium

6. 8our return will %enerall" be hi%her usin% the &&&&&&&&&& if "ou time "our transactions
poorl" and "our return will %enerall" be hi%her usin% the &&&&&&&&&& if "ou time "our
transactions well.
A. dollar-wei%hted return method9 dollar-wei%hted return method
'. dollar-wei%hted return method9 time-wei%hted return method
C. time-wei%hted return method9 dollar-wei%hted return method
(. time-wei%hted return method9 time-wei%hted return method

Difficulty: Medium

18-!0
:. Consider the Sharpe and *re"nor performance measures. #hen a pension fund is lar%e and
well diversified in total and it has man" mana%ers; the &&&&&&&&&& measure is better for
evaluatin% individual mana%ers while the &&&&&&&&&& measure is better for evaluatin% the
mana%er of a small fund with onl" one mana%er responsible for all investments that ma" not
be full" diversified.
A. Sharpe9 Sharpe
'. Sharpe9 *re"nor
C. *re"nor9 Sharpe
(. *re"nor9 *re"nor

Difficulty: Medium

8. <enri$sson found that; on avera%e; betas of funds &&&&&&&&&& durin% mar$et advances.
A. decreased sli%htl"
'. decreased ver" si%nificantl"
C. increased sli%htl"
(. increased ver" si%nificantl"

Difficulty: Medium

5. Suppose that over the same time period two portfolios have the same avera%e return and the
same standard deviation of return; but portfolio A has a hi%her beta than portfolio '.
Accordin% to the Sharpe measure; the performance of portfolio A &&&&&&&&&&.
A. is better than the performance of portfolio '
B. is the same as the performance of portfolio '
C. is poorer than the performance of portfolio '
(. cannot be measured since there is no data on the alpha of the portfolio

Difficulty: Medium

18-!5
1. 1ost professionall" mana%ed e/uit" funds &&&&&&&&&&.
A. outperform the S&P 5 inde. on both raw and ris$-ad)usted return measures
'. outperform the S&P 5 inde. on raw return measures and underperform the S&P 5
C. underperform the S&P 5 inde. on both raw and ris$-ad)usted return measures
(. underperform the S&P 5 inde. on raw return measures and outperform the S&P 5

Difficulty: Medium

*he ris$ free rate; avera%e returns; standard deviations and betas for three funds and the
S&P5 are %iven below.

11. #hat is the *
!
measure for portfolio A-
A. 1!.04
B. !.,84
C. .514
(. ,.604

Difficulty: Hard

18-!6
1!. #hat is the 1
!
measure for portfolio '-
A. .0,4
'. 1.!54
C. 1.::4
D. 1.0,4

Difficulty: Hard

1,. =f these portfolios are subcomponents which ma$e up part of a well diversified portfolio
then portfolio &&&&&& is preferred.
A. A
B. '
C. C
(. S&P5
+se the *
!
method@
Portfolio ' is preferred.

Difficulty: Hard

18-!:
10. 'ased on the 1
!
measure; portfolio C has a superior return of &&&&& as compared to the
S&P5.
A. -1.,,4
'. 1.0,4
C. !.4
(. .4

Difficulty: Hard

15. #hich one of the followin% is lar%el" based on forecasts of macroeconomic factors-
A. Securit" selection
'. Passive investin%
C. 1ar$et efficienc"
D. 1ar$et timin%

Difficulty: Easy

16. 'ased on the e.ample used in the boo$; a perfect mar$et timer would have made &&&&&&&
of dollars on a >1 investment between 15!6 and !8.
A. >1
'. >1;6!6
C. >1.5 million
D. >,6.: billion

Difficulty: Easy

18-!8
*he avera%e returns; standard deviations and betas for three funds are %iven below alon% with
data for the S&P 5 inde.. *he ris$ free return durin% the sample period is 64.

1:. 8ou wish to evaluate the three mutual funds usin% the Sharpe measure for performance
evaluation. *he fund with the hi%hest Sharpe measure of performance is &&&&&&&&&&.
A. ?und A
B. ?und '
C. ?und C
(. indeterminable

Difficulty: Medium

18-!5
18. 8ou wish to evaluate the three mutual funds usin% the *re"nor measure for performance
evaluation. *he fund with the hi%hest *re"nor measure of performance is &&&&&&&&&&.
A. ?und A
B. ?und '
C. ?und C
(. indeterminable

Difficulty: Medium

15. 8ou wish to evaluate the three mutual funds usin% the 2ensen measure for performance
evaluation. *he fund with the hi%hest 2ensen measure of performance is &&&&&&&&&&.
A. ?und A
B. ?und '
C. ?und C
(. S&P5

Difficulty: Medium

18-,
=n a particular "ear; Salmon Arm 1utual ?und earned a return of 164 b" ma$in% the
followin% investments in asset classes@

*he return on a bo%e" portfolio was 1!4 calculated as follows@

!. *he total e.cess return on the mana%ed portfolio was &&&&&&&&&&.
A. !4
'. ,4
C. 04
(. 54
E.cess Deturn L .16 - .1! L .0

Difficulty: Medium

!1. *he contribution of asset allocation across mar$ets to the total e.cess return was
&&&&&&&&&&.
A. 1.54
B. !.4
C. !.54
(. ,.54
H.! - .6IH.1 - .1!I M H.8 - .0IH.15 - .1!I L .!

Difficulty: Hard

18-,1
!!. *he contribution of securit" selection within asset classes to the total e.cess return was
&&&&&&&&&&.
A. 1.54
B. !.4
C. !.54
(. ,.54
H.1! - .1.! M H.1: - .15I.8 L .!

Difficulty: Hard

=n a particular "ear; Aost <ope 1utual ?und made the followin% investments in asset classes@

!,. *he total e.tra return on the mana%ed portfolio was &&&&&&&&&&.
A. 14
'. !4
C. ,4
(. 04
E.cess Deturn L H.8IH.5I M H.!IH.0I - .: L .1

Difficulty: Medium

18-,!
!0. *he contribution of asset allocation across mar$ets to the total e.tra return was
&&&&&&&&&&.
A. -14
'. 4
C. 14
D. !4
H.8 - .0IH.1 - .:I M H.! - .6IH.5 - .:I L .!

Difficulty: Hard

!5. *he contribution of securit" selection within asset classes to the total e.tra return was
&&&&&&&&&&.
A. -14
'. 4
C. 14
(. !4
H.5 - .1I.8 M H.0 - .5I.! L - .1

Difficulty: Hard

!6. #hich one of the followin% avera%in% methods is the preferred method of constructin%
returns series for use in evaluatin% portfolio performance-
A. Beometric avera%e
'. Arithmetic avera%e
C. (ollar-wei%hted
(. =nternal

Difficulty: Easy

18-,,
!:. *he &&&&&&&&&& calculates the reward to ris$ trade-off b" dividin% the avera%e portfolio
e.cess return b" the portfolio beta.
A. Sharpe measure
B. *re"nor measure
C. 2ensen measure
(. appraisal ratio

Difficulty: Easy

!8. =n creatin% the *
!
measure one mi.es P7 and *-bills to match the &&&&& of the mar$et and
in creatin% the 1
!
measure one mi.es P7 and *-bills to match the &&&&& of the mar$et.
A. alpha9 beta
'. beta9 alpha
C. beta9 standard deviation
(. standard deviation9 beta

Difficulty: Medium

!5. *he 1
!
measure of portfolio performance was developed b" &&&&&&&&&&&&&&.
A. 1odi%liani and *re"nor
B. 1odi%liani and 1odi%liani
C. 1erton and 1iller
(. ?ama and ?rench

Difficulty: Easy

,. Probabl" the bi%%est problem with evaluatin% portfolio performance of activel" mana%ed
funds is the assumption that &&&&&&&&&&&&&&&&&&&&&&&&&&.
A. the mar$ets are efficient
B. portfolio ris$ is constant over time
C. diversification pa"s off
(. securit" selection is more valuable than asset allocation

Difficulty: Easy

18-,0
,1. Perfect timin% abilit" is e/uivalent to havin% &&&&&&&&&& on the mar$et portfolio.
A. a call option
'. a futures contract
C. a put option
(. a forward contract

Difficulty: Easy

,!. Cne hundred fund mana%ers enter a contest to see how man" times in thirteen "ears the"
can earn a hi%her return than their competitors. *he probabilit" distribution of the number of
successful "ears out of thirteen for the best performin% mone" mana%ers is

Cut of this sample; chance alone would indicate that there is a &&&&&& probabilit" that
someone would beat the mar$et at least 11 times out of 1, "ears.
A. 51.,4
'. 65.54
C. 6:.14
(. 1.8,4
Probabilit" L 51., M 10.6 M 1.! L 6:.14

Difficulty: Hard

18-,5
,,. *he *re"nor-'lac$ model is a model that shows how an investment mana%er can use
securit" anal"sis and statistics to construct &&&&&&&&&&.
A. a mar$et portfolio
'. a passive portfolio
C. an active portfolio
(. an inde. portfolio

Difficulty: Easy

,0. =f an investor is a successful mar$et timer; his distribution of monthl" portfolio returns
will &&&&&&&&&&.
A. be s$ewed to the left
B. be s$ewed to the ri%ht
C. e.hibit $urtosis
(. e.hibit neither s$ewness nor $urtosis

Difficulty: Easy

,5. Decent anal"sis indicates that the st"le of investin% is a critical component of fund
performance. =n fact on avera%e about &&&&& of fund performance is attributable to the asset
allocation decision.
A. 684
'. :04
C. 884
D. 5:4

Difficulty: Medium

,6. =n the *re"nor-'lac$ model; the active portfolio will contain stoc$s with &&&&&&&&&&.
A. alphas e/ual to Eero
'. ne%ative alphas
C. positive alphas
(. some ne%ative and some positive alphas

Difficulty: Easy

18-,6
,:. Portfolio performance is often decomposed into various subcomponents such as the return
due to &&&&&&&&&&&.
=. broad asset allocation across securit" classes
==. sector wei%htin%s within e/uit" mar$ets
===. securit" selection with a %iven sector
*he one decision that contributes most to the fund performance is
A. =
'. ==
C. ===
(. All contribute e/uall" to fund performance

Difficulty: Easy

,8. *he theor" of efficient frontiers has &&&&&&&&&&.
A. no adherents amon% practitioners
'. a small number of adherents amon% practitioners
C. a si%nificant number of adherents amon% practitioners
(. complete support b" practitioners

Difficulty: Easy

,5. =n the *re"nor-'lac$ model securit" anal"sts &&&&&&&&&&.
A. anal"Ee a relativel" small number of stoc$s
'. anal"Ee all stoc$s which are publicl" traded
C. are redundant
(. devote their attention to mar$et timin% rather than fundamental anal"sis

Difficulty: Easy

0. =n the *re"nor-'lac$ model securit" anal"sts &&&&&&&&&&.
A. anal"Ee the entire universe of stoc$s
'. assume that mar$ets are inefficient
C. treat mar$et inde. as a baseline portfolio upon which an active portfolio is constructed
(. focus on selectin% the best performin% bo%e"

Difficulty: Easy

18-,:
01. Active portfolio mana%ement consists of &&&&&&&&&&.
=. mar$et timin%
==. securit" selection
===. sector selection within %iven mar$ets
=F. inde.in%
A. = and == onl"
'. == and === onl"
C. =; == and === onl"
(. =; ==; === and =F

Difficulty: Easy

0!. A mar$et timin% strate%" is one where asset allocation in the stoc$ mar$et &&&&&&&&&&
when one forecasts the stoc$ mar$et will outperform treasur" bills.
A. decreases
B. increases
C. remains the same
(. ma" increase or decrease

Difficulty: Easy

0,. =n the *re"nor-'lac$ model; the contribution of individual securit" to the active portfolio
should be based primaril" on the stoc$3s &&&&&&&&&.
A. alpha
'. beta
C. the residual variance
D. appraisal ratio

Difficulty: Medium

18-,8
00. =f all &&& are &&& in the *re"nor-'lac$ model; there would be no reason to depart from the
passive portfolio.
A. alphas9 Eero
'. alphas9 positive
C. betas9 positive
(. standard deviations9 positive

Difficulty: Medium

05. =n the *re"nor-'lac$ model; the wei%ht of each anal"Eed securit" in the portfolio should
be proportional to its &&&&&&&&&&.
A. alphaGbeta
B. alphaGresidual variance
C. betaGresidual variance
(. none of the above

Difficulty: Easy

06. *he critical variable in the determination of the success of the active portfolio is the
stoc$3s &&&&&&&&&&.
A. alphaGnons"stematic ris$
'. alphaGs"stematic ris$
C. deltaGnons"stematic ris$
(. deltaGs"stematic ris$

Difficulty: Medium

0:. Consider the theor" of active portfolio mana%ement. Stoc$s A and ' have the same
positive alpha and the same nons"stematic ris$. Stoc$ A has a hi%her beta than stoc$ '. 8ou
should want &&&&&&&&&& in "our active portfolio.

Difficulty: Medium

18-,5
08. Consider the theor" of active portfolio mana%ement. Stoc$s A and ' have the same beta
and non-s"stematic ris$. Stoc$ A has hi%her positive alpha than stoc$ '. 8ou should want
&&&&&&&&&& in "our active portfolio.
B. more of stoc$ A than stoc$ '

Difficulty: Medium

05. *he mar$et timin% form of active portfolio mana%ement relies on &&&&&&&&&& forecastin%
and the securit" selection form of active portfolio mana%ement relies on &&&&&&&&&&
forecastin%.
A. macroeconomic9 macroeconomic
B. macroeconomic9 microeconomic
C. microeconomic9 macroeconomic
(. microeconomic9 microeconomic

Difficulty: Medium

5. Active portfolio mana%ers tr" to construct a ris$" portfolio with &&&&&&&.
A. a hi%her Sharpe measure than a passive strate%"
'. a lower Sharpe measure than a passive strate%"
C. the same Sharpe measure as a passive strate%"
(. ver" few securities

Difficulty: Medium

51. =n performance measurement the bo%e" portfolio is desi%ned to &&&&&&&&&.
A. measure the returns to a completel" passive strate%"
'. measure the returns to a similar active strate%"
C. measure the returns to a %iven investment st"le
(. e/ual the return on the S&P5

Difficulty: Medium

18-0
5!. &&&&&&&&&& portfolio mana%erHsI e.perience strea$s of abnormal returns which are hard
to label as luc$" outcomes; and &&&& anomalies in realiEed returns have been sufficientl"
persistent such that portfolio mana%ers could use them to beat a passive strate%" over
prolon%ed periods.
A. Jo9 no
'. Jo9 some
C. Some9 no
D. Some9 some

Difficulty: Medium

5,. A passive benchmar$ portfolio is &&&&&&&&&&&&&&&.
=. a portfolio where the asset allocation across broad asset classes is neutral and not
determined b" forecasts of performance of the different asset classes
==. one where an inde.ed portfolio is held within each asset class
===. often called the bo%e"
A. = onl"
'. = and === onl"
C. == and === onl"
D. =; == and ===

Difficulty: Medium

50. *he correct measure of timin% abilit" is &&&&&&&&&&&& for a portfolio mana%er who
correctl" forecasts 554 of bull mar$ets and 554 of bear mar$ets.
A. -54
'. 54
C. 14
(. 554
*imin% abilit" L .55 M .55 - 1 L .1

Difficulty: Medium

18-01
55. =t is ver" hard to statisticall" verif" abnormal fund performance because of all e.cept
which one of the followin%-
A. =nevitabl" some fund mana%ers e.perience strea$s of %ood performance that ma" )ust be
due to luc$
'. *he noise in realiEed rates of return is so lar%e as to ma$e it hard to identif" abnormal
performance in competitive mar$ets
C. Portfolio composition is rarel" stable lon% enou%h to identif" abnormal performance
D. Even if successful; there is reall" not much value to be added b" active strate%ies such as
mar$et timin%

Difficulty: Medium

56. Stoc$s A and ' have alphas of .1 and betas of .5. Stoc$ A has a residual variance of .
! while stoc$ ' has a residual variance of .16. =f stoc$ A represents !4 of an active
portfolio; stoc$ ' should represent &&&&&&&&&& of an active portfolio.
A. 1.64
'. !.4
C. !.!4
D. !.54

Difficulty: Medium

18-0!
5:. Portfolio mana%ers Paul 1artin and Kevin Krue%er each mana%e >1;; funds. Paul
:4 of all bear mar$ets. *he correct measure of timin% abilit" for Kevin Krue%er is
&&&&&&&&&&.
A. !4
'. 64
C. :54
(. 1!4
*imin% abilit" L .5 M .: - 1 L .!

Difficulty: Easy

58. Portfolio mana%ers Paul 1artin and Kevin Krue%er each mana%e >1;; funds. Paul
:4 of all bear mar$ets. *he value of Kevin Krue%er3s imperfect forecastin% abilit" is
&&&&&&&&&&.
A. >,;
'. >6:;5
C. >18;:5
(. >!1:;5

Difficulty: Medium

18-0,
55. Chuc$ (ou%lass; an imperfect forecaster correctl" predicts 5:4 of all bull mar$ets and
684 of all bear mar$ets. Do" Simmonds is a perfect forecaster. =f Chuc$ (ou%lass is able to
char%e a fee of >1!5;; the fee that Do" Simmonds should char%e is &&&&&&&&&&. Assume
that both forecasters mana%e similar siEe funds.
A. >,1;!5
'. >!;
C. >5;
(. >6!5;

Difficulty: Medium

6. A mutual fund invests in lar%e-capitaliEation stoc$s. =ts performance should be measured
a%ainst which one of the followin%-
A. Dussell ! inde.
B. S&P 5 inde.
C. #ilshire 5 inde.
(. (ow 2ones =ndustrial Avera%e

Difficulty: Easy

61. Assume "ou purchased a rental propert" for >1; and sold it one "ear later for
>115; Hthere was no mort%a%e on the propert"I. At the time of the sale; "ou paid >,; in
commissions and >1; in ta.es. =f "ou received >1; in rental income Hall received at the
end of the "earI; what annual rate of return did "ou earn-
A. 64
'. 114
C. !4
(. !54
H1; M , M 1;IH1 M rI
1
L H115; M 1;I9 r L !.154

Difficulty: Medium

18-00
*he table presents the actual return of each sector of the mana%er3s portfolio in column H1I;
the fraction of the portfolio allocated to each sector in column H!I; the benchmar$ or neutral
sector allocations in column H,I; and the returns of sector inde.es in column 0.

6!. #hat was the mana%er3s return in the month-
A. !.:4
'. !.!14
C. !.!04
(. 0.84
Actual L .6 . ,.4 M ., . 1.,4 M .1 . .54 L !.!04

Difficulty: Medium

6,. #hat was the bo%e"3s return in the month-
A. !.:4
B. !.!14
C. !.!04
(. 0.84
'o%e" L .5 . ,.!4 M .0 . 1.04 M .1 . .54 L !.!14

Difficulty: Medium

18-05
60. #hat was the mana%er3s over or under performance for the month-
A. +nder performance L .,4
B. Cver performance L .,4
C. Cver performance L .104
(. +nder performance L ,4
Cver performance L Actual - 'o%e" L !.!04 - !.!14 L .,4

Difficulty: Medium

65. #hat is the contribution of securit" selection to relative performance-
A. -.154
'. .154
C. -.,4
(. .,4

Difficulty: Hard

18-06
66. #hat is the contribution of asset allocation to relative performance-
A. -.184
B. .184
C. -.154
(. .154

Difficulty: Hard

6:. 1ornin%star3s DAD produce results which are similar but not identical to &&&&&&&&.
A. 2ensen3s alpha
'. 1
!
C. the *re"nor ratio
D. the Sharpe ratio

Difficulty: Medium

68. *he *re"nor-'lac$ 1odel assumes securit" mar$ets are &&&&&&&&&.
A. completel" efficient
B. nearl" efficient
C. ver" inefficient
(. random wal$s

Difficulty: Easy

18-0:
65. *he appraisal ratio is e/ual to the stoc$3s &&&& divided b" its &&&&&&.
A. diversifiable ris$9 beta
'. beta9 alpha
C. alpha9 beta
D. alpha9 diversifiable ris$

Difficulty: Medium

:. Empirical tests to date show &&&&&&&&&&&&&&.
A. that man" investors have earned lar%e rewards b" mar$et timin%
B. little evidence of mar$et timin% abilit"
C. clear cut evidence of substantial mar$et timin% abilit"
(. evidence that absolutel" no mar$et timin% abilit" e.ists

Difficulty: Easy

1:4. *he mar$et inde. return is 104 and has a standard deviation of !14. #hat is the 1
!

A. .584
'. .684
C. .:84
D. .884
P L !1G1: L 1.!,5
D
p
L H.1, . 1.!,5I M H-.!,5 ..5I L 10.884
1
!
L 10.88 - 10. L .884

Difficulty: Medium

18-08
:!. A portfolio %enerates an annual return of 1:4; a beta of 1.! and a standard deviation of
154. *he mar$et inde. return is 1!4 and has a standard deviation of 164. #hat is the 1
!

A. !.154
'. !.:64
C. !.504
(. ,.104
P L 16G15 L .80
D
p
L H.80 . .1:I M H.16 . . 0I L 10.504
1
!
L 10.50 - 1!. L !.504

Difficulty: Medium

:,. A portfolio %enerates an annual return of 1,4; a beta of .: and a standard deviation of
A. .110,
'. .1!,,
C. .1,50
(. .10::
*re"nor measure L H.1, - .5IG.: L .110,

Difficulty: Medium

A. .8,,
'. .18,
C. .1110
(. .116,
*re"nor measure L H.16 - .6IG1.! L .8,,

Difficulty: Medium

18-05
A. .,5:8
'. .0158
C. .056,
D. .0:6
Sharpe measure L H.1, - .5IG.1: L .0:6

Difficulty: Medium

A. .0:5:
B. .5!6,
C. .680!
(. .:!5!
Sharpe measure L H.16 - .6IG.15 L .5!6,

Difficulty: Medium

::. A portfolio %enerates an annual return of 1,4; a beta of .: and a standard deviation of
1:4. *he mar$et inde. return is 104 and has a standard deviation of !14. #hat is 2ensen3s
A. .1:
'. .,0
C. .6:
(. .:8
2ensen measure L .1, - N.5 M .:H.10 - .5IO L .1:

Difficulty: Medium

18-5
154. *he mar$et inde. return is 1!4 and has a standard deviation of 164. #hat is 2ensen3s
A. .1:
B. .!8
C. .,6
(. .:8
2ensen measure L .16 - N.6 M 1.!H.1! - .6IO L .!8

Difficulty: Medium

:5. *he portfolio that contains the benchmar$ asset allocation a%ainst which a mana%er will
be measured is often called &&&&&&&&&&&&&.
'. the Fan%uard =nde.
C. 2ensen3s alpha
(. the *re"nor measure

Difficulty: Easy

8. An attribution anal"sis will JC* li$el" contain which of the followin% components-
A. Asset allocation
'. =nde. returns
C. Dis$ free returns
(. Securit" selection

Difficulty: Easy

18-51
81. #hich of the followin% investment strate%ies would have produced the hi%hest returns in
the time period since 15!6-
A. * bills portfolio
'. S&P 5 inde. fund
C. Perfect mar$et timin%
(. Dandom stoc$ selection

Difficulty: Easy

8!. #hat phrase mi%ht be used as a substitute for the *re"nor-'lac$ model developed in
15:,-
A. Solel" active mana%ement
B. Enhanced inde. approach
C. Passive mana%ement
(. Dandom selection

Difficulty: Easy

8,. #hat is the term for the process used to assess portfolio mana%er performance-
A. Active anal"sis
B. Attribution anal"sis
C. Passive anal"sis
(. *re"nor 'lac$ Anal"sis

Difficulty: Easy

80. A fund has e.cess performance of 1.54. =n loo$in% at the fund3s investment brea$down
"ou see that the fund overwei%hed e/uities relative to the benchmar$ and the avera%e return
on the fund3s e/uit" portfolio was sli%htl" lower than the e/uit" benchmar$ return. *he e.cess
performance for this fund is probabl" due to &&&&&&&&&&&&&&&.
A. securit" selection abilit"
'. better sector wei%htin%s in the e/uit" portfolio
C. the asset allocation decision
(. findin% securities with positive alphas

Difficulty: Medium

18-5!
85. ?or a mar$et timer the &&&&&&&&&&&&& will be hi%her when D
1
is hi%her.
A. portfolio3s alpha and beta
'. portfolio3s uns"stematic ris$
C. portfolio3s beta and slope of the characteristic line
(. securit" selection component of the portfolio

Difficulty: Medium

86. *he *re"nor-'lac$ model combines an activel" mana%ed portfolio with an efficientl"
diversified portfolio in order to &&&&&&&&&&&&&&&&&&&&&&&.
=. improve the diversification of the overall portfolio
==. improve the overall portfolio3s Sharpe ratio
===. reach a hi%her CAA than otherwise would be possible
A. = onl"
'. = and == onl"
C. == and === onl"
(. =; == and ===

Difficulty: Medium

8:. Consider the theor" of active portfolio mana%ement. Stoc$s A and ' have the same beta
and the same positive alpha. Stoc$ A has hi%her nons"stematic ris$ than stoc$ '. 8ou should
want &&&&&&&&&& in "our active portfolio.

Difficulty: Medium

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Chapter 18 - Portfolio Performance Evaluation

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