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Portfolio Performance Evaluation

The document consists of a series of questions related to performance measures, market timing strategies, and portfolio return methodologies in finance. It includes multiple-choice questions that assess understanding of concepts such as the Sharpe ratio, alpha, and regression analysis in evaluating portfolio performance. The questions also explore the implications of statistical results in determining the success of portfolio managers' claims.

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12 views7 pages

Portfolio Performance Evaluation

The document consists of a series of questions related to performance measures, market timing strategies, and portfolio return methodologies in finance. It includes multiple-choice questions that assess understanding of concepts such as the Sharpe ratio, alpha, and regression analysis in evaluating portfolio performance. The questions also explore the implications of statistical results in determining the success of portfolio managers' claims.

Uploaded by

genius_2
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Question #1 of 14 Question ID: 1506425

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) Sharpe ratio.
C) Information ratio.
D) Jensen's alpha.

Question #2 of 14 Question ID: 1506429


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)

where:

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) I, II, and IV.


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

Question #3 of 14 Question ID: 1506423

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


A) Return regression model assumes that the error terms are uncorrelated over time.
CAPM is based on a single factor, the market portfolio, which explains the variations
B)
in realized portfolio returns.
Performance of two portfolio managers cannot be compared based on estimates of
C)
IR (information ratio)—excess returns per unit of risk.
Sharpe ratio of an actively managed portfolio (statistically) significantly greater than
D)
the benchmark Sharpe ratio is taken as evidence of superior performance.

Question #4 of 14 Question ID: 1506422

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

Dollar-weighted returns measure compounding of $1.00 and account for cash


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

Question #5 of 14 Question ID: 1506430


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

Question #6 of 14 Question ID: 1506428

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

Question #7 of 14 Question ID: 1506424

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

return-based performance analysis is a method of assessing risk and returns of an


A)
investment.
hedge funds use only return-based performance analysis to evaluate managers’
B)
performance and skill.
the term performance analysis refers to return-based performance analysis and
C)
portfolio-based performance analysis.
return-based advanced performance analysis adds statistical and theoretical
D)
refinement to the basic model.

Question #8 of 14 Question ID: 1506431

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; fail to reject.


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

Question #9 of 14 Question ID: 1506432

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

Question #10 of 14 Question ID: 1506427

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 Accept

B) 9.377 Accept

C) 10.66 Reject

D) 9.377 Reject

Question #11 of 14 Question ID: 1506435

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

A) 97.3% of returns came from security selection.


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

Question #12 of 14 Question ID: 1506426


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) An information ratio that is greater than zero.


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

Question #13 of 14 Question ID: 1506433

Risk consciousness within and among organizations is mainly derived from:

banks, investors, boards of investment clients, senior management, and plan


A)
sponsors.
governmental entities and boards of investment clients, senior management and
B)
plan sponsors, only.
C) banks and investors, only.
D) governmental entities, only.

Question #14 of 14 Question ID: 1506434

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

A) style bets, only.


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

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