Topic 65: Portfolio Performance Evaluation Test ID: 9501116

Question #1 of 14 Question ID: 440517

Benchmark Timing regression (below) is used to evaluate market timing skills of a portfolio manager. A successful market timer
will correctly foresee the future directions of the market and will load the portfolio with high beta stocks (low beta stocks) for
pending up market (down market).

RP(t) = αP + BP × RB(t) + MTCP(Dt × RB(t)) + εP(t)

RP(t) = realized returns on a portfolio p during time t
αP = intercept of the regression equation
BP = portfolio beta
MTCP = market timing estimated coefficient
εP(t) = regression error terms during time period t
Dt = a dummy variable that is assigned a value of zero for down market and a value of 1 for up market

Regression on twelve years of portfolio returns produces an estimate of MTCP = 4.3 with a standard error of 1.4. These results
offer an evidence of a market timing strategy:

I. which is successful.
II. which produces a t-statistic of 3.07.
III. which prohibits us from rejecting the null hypothesis of H0: true, MTCP = 0.
IV. which enables us to give due credit to the portfolio manager for implementing a successful market timing strategy.

Which of the above statements are CORRECT?

A) II, III, and IV.

B) I, II, III, and IV.
C) I, II, and IV.
D) I, II, and III.

Question #2 of 14 Question ID: 440514

Which of the following statements regarding the use of traditional performance measures is an indication of either superior or
inferior risk-adjusted portfolio returns?

A) A Sharpe ratio that is greater than zero.

B) A Jensen's alpha that is statistically significantly different from zero.
C) A Sharpe ratio that is statistically significantly different from zero.
D) An information ratio that is greater than zero.

Question #3 of 14 Question ID: 440511

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Based on monthly returns for an actively managed portfolio during the last five years, a benchmark timing regression equation
produces an estimate of MTCP (market timing coefficient) equal to 2.3 and a standard error of the estimate equal to 1.8. Based
on the estimated t-statistics of _______, we _____________ the null hypothesis that true MTCP = 0 (absence of market timing
skills) at 99% confidence level.

A) 1.27; reject.
B) 3.67; reject.
C) 1.27; fail to reject.
D) 2.66; fail to reject.

Question #4 of 14 Question ID: 440516

A portfolio manager produced an alpha of 2.5% based on monthly returns over a 6 year period. Under the assumption of a normal
distribution, the portfolio manager claims that the probability of observing such a large alpha by chance is only 1%. To test her
claim, one would use a t-test using which level of confidence?

A) 90%.
B) 99%.
C) 95%.
D) 97%.

Question #5 of 14 Question ID: 440521

All of the following statements regarding performance analysis are correct EXCEPT:

A) return-based advanced performance analysis adds statistical and theoretical refinement to the basic
model.

B) return-based performance analysis is a method of assessing risk and returns of an investment.

C) the term performance analysis refers to return-based performance analysis and portfolio-based
performance analysis.

D) hedge funds use only return-based performance analysis to evaluate managers' performance and
skill.

Question #6 of 14 Question ID: 440520

How many of the following statements, regarding the cross-sectional analysis of fund managers' performance, are CORRECT?
Cross-sectional analysis:
I. focuses only on surviving firms.
II. does not make adjustment for the size of a portfolio.
III. does not make adjustment for the riskiness of a portfolio.
IV. offers only a snapshot of performance.

A) Three of these.

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 B) All of these.
C) None of these.
D) Two of these.

Question #7 of 14 Question ID: 440512

Nazik, a portfolio manager, claims to have consistently produced excessive returns (over and above the benchmark returns) 95%
of the time due to her skill and not luck. To support her claim, she presents regression results based on 72 monthly observations
as follows:
alpha = 0.58%.

standard error of alpha = 0.232%

Would you reject the null hypothesis of true α = 0 and accept her claim of superior performance 95% of the time due to her skill?

A) t = 2.50; reject the null hypothesis; accept her claim.

B) t = 2.39; reject the null hypothesis; accept her claim.
C) t = 2.39; fail to reject the null hypothesis; accept her claim.
D) t = 2.50; reject the null hypothesis; reject her claim.

Question #8 of 14 Question ID: 444869

Sharpe's evaluation of Fidelity Magellan Fund using the concept of style analysis concluded that:

A) 78% of returns came from style bets.

B) 78% of returns came from market timing.
C) 97.3% of returns came from asset allocation.
D) 97.3% of returns came from security selection.

Question #9 of 14 Question ID: 444868

Sharpe's style analysis technique uses regression analysis to determine a fund's contribution from:

A) style bets, only.

B) market timing bets and security selection bets, only.
C) asset allocation bets, only.
D) asset allocation bets and selection bets, only.

Question #10 of 14 Question ID: 444867

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Which of the following statements is most accurate about portfolio return methodologies?

A) Time-weighted rates of return are internal rates of return (IRR) that account for cash inflows and
outflows and dollar-weighted rates of return measure compounding of $1.00.

B) Dollar-weighted returns measure compounding of $1.00 and account for cash inflows and outflows
and time-weighted rates of return are internal rates of return.

C) Time-weighted rates of return are internal rates of return (IRR) and dollar-weighted rates of return
measure compounding of $1.00 and account for cash inflows and outflows.

D) Dollar-weighted returns are internal rates of return (IRR) that account for cash inflows and outflows
and time-weighted rates of return measure compounding of $1.00.

Question #11 of 14 Question ID: 440519

Which of the following statements regarding performance analysis is NOT correct?

A) CAPM is based on a single factor, the market portfolio, which explains the variations in realized
portfolio returns.

B) Sharpe ratio of an actively managed portfolio (statistically) significantly greater than the benchmark
Sharpe ratio is taken as evidence of superior performance.

C) Performance of two portfolio managers cannot be compared based on estimates of IR (information

ratio)-excess returns per unit of risk.

D) Return regression model assumes that the error terms are uncorrelated over time.

Question #12 of 14 Question ID: 440510

Which of the following performance measures is best described as a measure of excess return per unit of risk of obtaining
excess returns?

A) Treynor measure.
B) Jensen's alpha.
C) Sharpe ratio.
D) Information ratio.

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Question #13 of 14 Question ID: 440518

During the last fifteen years, Norma, a portfolio manager, earned excess returns (over risk-free rate) of 16% with a standard
deviation of 12%. During the same time period, excess returns (over risk-free rate) and standard deviation of a benchmark
portfolio were 11% and 14% respectively. Norma claims to have beaten the benchmark portfolio at 95% confidence level. Based
on our estimation:
I. we reject her claim.
II. we fail to reject her claim.

Which of the above statements is (are) CORRECT given that the t-statistic for the Sharpe ratio is 1.5?

A) I only.
B) Both I and II.
C) II only.
D) Neither I nor II.

Question #14 of 14 Question ID: 459981

Based upon 60 monthly returns, you estimate an actively managed portfolio alpha of 1.28% and a standard error of alpha of
0.1365%. The portfolio manager wants to get due credit for producing positive alpha and believes that hypothesis testing should
be conducted to test for a statistically significant alpha. Calculate the t-statistic, and state whether you would accept or reject the
null hypothesis.

t-statistic Accept/Reject

A) 10.66 Reject

B) 9.377 Accept

C) 10.66 Accept

D) 9.377 Reject

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