Online Quiz for Performance Evaluation

Question: The Jensen portfolio evaluation measure

Correct
Answer:

is an absolute measure of abnormal return above or

below that predicted by the CAPM.

Question: The __________ measures the reward to volatility trade-off by

dividing the average portfolio excess return by the standard deviation of
returns.
Correct Answer:

Sharpe index

Question: The following data relates to the performance of Sooner Stock

Fund and the market portfolio:
Sooner
Market Portfolio
Average Return
20%
11%
Standard Deviation of
44%
19%
Returns
Beta
1.8
1.0
Residual Variance
0.02
0
The risk-free return during the sample period was 3%.
What is the Treynor measure of performance evaluation for Sooner Stock
Fund?
Correct Answer:

0.0944

Question: The following data relates to the performance of Sooner Stock

Fund and the market portfolio:
Sooner
Market Portfolio
Average Return
20%
11%
Standard Deviation of
44%
19%
Returns
Beta
1.8
1.0
Residual Variance
0.02
0
The risk-free return during the sample period was 3%.
Calculate the appraisal ratio for Sooner Stock Fund?
Selected Answer:

0.13

Correct Answer:
Response
Feedback:

0.18

ARp= alpha/residual standard deviation. alpha= 0.20 - [0.03

+ 1.8(0.11 0.03)] = 0.026. ARp= 0.026/SQRT(0.02)= 0.18

Question: Suppose you own two stocks, A and B. In year 1, stock A earns
a 2% return and stock B earns a 9% return. In year 2, stock A earns an
18% return and stock B earns an 11% return. __________ has the higher
arithmetic average return.
Correct
Answer:

the two stocks have the same arithmetic average

return

Question: Suppose you buy 100 shares of Abolishing Dividend

Corporation at the beginning of year 1 for $80. Abolishing Dividend
Corporation pays no dividends. The stock price at the end of year 1 is
$100, the price $120 at the end of year 2, and the price is $150 at the
end of year 3. The stock price declines to $100 at the end of year 4, and
you sell your 100 shares. For the four years, your geometric average
return per annum is
Correct Answer:

5.7%

Question: Suppose two portfolios have the same average excess return,
the same standard deviation of returns, but portfolio A has a higher beta
than portfolio B. According to the Treynor measure, the performance of
portfolio A __________.
Correct Answer:

is poorer than the performance of portfolio B

Question: Suppose two portfolios have the same average excess return,
the same standard deviation of returns, but Buckeye Fund has a higher
beta than Gator Fund. According to the Sharpe measure, the performance
of Buckeye Fund _________.
Correct Answer:

is the same as the performance of Gator Fund.

Question: You want to evaluate three mutual funds using the Treynor
measure for performance evaluation. The risk-free return during the
sample period is 6%. The average returns, standard deviations, and betas
for the three funds are given below, in addition to information regarding
the S&P 500 index.
Avera Standar Beta
ge
d
Retur Deviati
n
on
Fund A 13%
10%
0.5
Fund B 19%
20%
1.0
Fund C 25%
30%
1.5
S&P50 18%
16%
1.0
0
The fund with the highest Treynor measure is __________.
Correct Answer:

Fund A

Question: The following data relates to the performance of Sooner Stock

Fund and the market portfolio:
Sooner
Market Portfolio
Average Return
20%
11%
Standard Deviation of
44%
19%
Returns
Beta
1.8
1.0
Residual Variance
0.02
0
The risk-free return during the sample period was 3%.
What is the Sharpe measure of performance evaluation for Sooner Stock
Fund?
Correct Answer:

0.386

(0.20 0.03)/0.44 = 0.386.

Question: Which of the following statements is true?

Selected
In the annual report of a managed fund, you are likely to
Answer: observe the arithmetical average return rather than the
geometrical average return as the former usually gives a
higher value.
Correct
Answer:

None of the above

Response All of the statements are false. Arithmetic (Geometric)

Feedback average is used for averaging continuously compounded
:
(discrete) returns. We can use either discrete or continuously
compounded methods to compute returns over time. In the
annual report of a managed fund, we observe the geometric
average return.
Question: Suppose the risk-free return is 4%. The beta of a managed
portfolio is 1.2, the alpha is 1%, and the average return is 14%. Based on
Jensen's measure of portfolio performance, you would calculate the return
on the market portfolio as
Correct Answer:

11.5%

Question: You want to evaluate three mutual funds using the Sharpe
measure for performance evaluation. The risk-free return during the
sample period is 6%. The average returns, standard deviations and betas
for the three funds are given below, as is the data for the S&P 500 index.
Avera Standar Beta
ge
d
Retur Deviati
n
on
Fund A 24%
30%
1.5
Fund B 12%
10%
0.5
Fund C 22%
20%
1.0
S&P50 18%
16%
1.0
0
The fund with the highest Sharpe measure is __________.
Selected Answer:

Fund A

Correct Answer:

Fund C

Response
Feedback:

A: (24% - 6%)/30% = 0.60; B: (12% - 6%)/10% = 0.60; C:

(22% - 6%)/20% = 0.80; S&P 500: (18% - 6%)/16% = 0.75.

Question: The Jensen portfolio evaluation measure

Correct
Answer:

is an absolute measure of abnormal return above or

below that predicted by the CAPM.

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

stock B