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Exam 24: Portfolio Performance Evaluation

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Question 1

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Rodney holds a portfolio of risky assets that represents his entire risky investment. To evaluate the performance of Rodney's portfolio, in which order would you complete the steps listed? I) Compare the Sharpe measure of Rodney's portfolio to the Sharpe measure of the best portfolio. II) State your conclusions. III) Assume that past security performance is representative of expected performance. IV) Determine the benchmark portfolio that Rodney would have held if he had chosen a passive strategy.

A) I, III, IV, II
B) III, IV, I, II
C) IV, III, I, II
D) III, II, I, IV
E) III, I, IV, II

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Question 2

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The following data are available relating to the performance of Wildcat Fund and the market portfolio: $\begin{array} { l c c } & & { \text { Market } } \\& \text { Wildcat } & \text { Portfolio } \\\text { Average return } & 18 \% & 15 \% \\\text { Standard deviations of returns } & 25 \% & 20 \% \\\text { Beta } & 1.25 & 1.00 \\\text { Residual standard deviation } & 2 \% & 0 \%\\\end{array}$ The risk-free return during the sample period was 7%. Calculate Sharpe's measure of performance for Wildcat Fund.

A) 1.00%
B) 8.80%
C) 44.00%
D) 50.00%

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Question 3

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The following data are available relating to the performance of Monarch Stock Fund and the market portfolio: $\begin{array} { l c c } & & \text { Market } \\& \text { Monarch } & \text { Portfolio } \\\text { Average return } & 16 \% & 12 \% \\\text { Standard deviations of returns } & 26 \% & 22 \% \\\text { Beta } & 1.15 & 1.00 \\\text { Residual standard deviation } & 1 \% & 0 \% \\\end{array}$ The risk-free return during the sample period was 4%. Calculate Treynor's measure of performance for Monarch Stock Fund.

The following data are available relating to the performance of Wildcat Fund and the market portfolio: $\begin{array} { l c c } & & { \text { Market } } \\& \text { Wildcat } & \text { Portfolio } \\\text { Average return } & 18 \% & 15 \% \\\text { Standard deviations of returns } & 25 \% & 20 \% \\\text { Beta } & 1.25 & 1.00 \\\text { Residual standard deviation } & 2 \% & 0 \%\\\end{array}$ The risk-free return during the sample period was 7%. Calculate Jensen's measure of performance for Wildcat Fund.

You want to evaluate three mutual funds using the Jensen measure for performance evaluation. The risk-free return during the sample period is 6%, and the average return on the market portfolio is 18%. The average returns, standard deviations, and betas for the three funds are given below. $\begin{array}{c}\begin{array}{lll}\text { } \\\text { } \\\text { } \\\text { Fund A } \\\text { Fund B } \\\text { Fund C } \\\end{array}\begin{array}{lll}\text { } \\\text { Average } \\\text {Return } \\17.6\% \\17.5\% \\17.4\% \\\end{array}\begin{array}{lll}\text {Residual } \\\text { Standand } \\\text { Deviation.} \\\text {10\% } \\\text {20\% } \\\text { 30\% } \\\end{array}\begin{array}{lll}\text { } \\\text { } \\\text {Beta } \\\text { 1.2 } \\\text { 1.0 } \\\text { 0.8 } \\\end{array}\end{array}$ The fund with the highest Jensen measure is

Suppose you purchase one share of the stock of Cereal Correlation Company at the beginning of year 1 for $50. At the end of year 1, you receive a $1 dividend and buy one more share for $72. At the end of year 2, you receive total dividends of $2 (i.e., $1 for each share) and sell the shares for $67.20 each. The dollar-weighted return on your investment is

Suppose two portfolios have the same average return and 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

In a particular year, Razorback Mutual Fund earned a return of 1% by making the following investments in asset classes: $\begin{array}{lcc} & \text { Weight } & \text { Return } \\\hline \text { Bonds } & 20 \% & 5 \%\\\text { Stocks } & 80 \% & 0 \% \\\hline\end{array}$ The return on a bogey portfolio was 2%, calculated from the following information. $\begin{array}{lccc} & \text { Weight } & \text { Return } \\\text { Bonds (Lehman Brother Index) } & 50 \% & 5 \% \\\text { Stocks (S\&P } 500 \text { Index) } & 50 \% & -1 \% \\\hline\end{array}$ The total excess return on the Razorback Fund's managed portfolio was

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, $120 at the end of year 2, and $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 is

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. $\begin{array} { c c r r } & \begin{array} { c } \text { Average } \\\text { Return }\end{array} & \begin{array} { r } \text { Standard } \\\text { Deviation }\end{array} & \text { Beta } \\\hline \text { Fund A } & 13 \% & 10 \% & 0.5 \\\text { Fund B } & 19 \% & 20 \% & 1.0 \\\text { Fund C } & 25 \% & 30 \% & 1.5 \\\text { S\&P 500 } & 18 \% & 16 \% & 1.0\end{array}$ The fund with the highest Treynor measure is

The __________ measures the reward to volatility trade-off by dividing the average portfolio excess return by the standard deviation of returns.

Suppose the risk-free return is 3%. The beta of a managed portfolio is 1.75, the alpha is 0%, and the average return is 16%. Based on Jensen's measure of portfolio performance, you would calculate the return on the market portfolio as

The following data are available relating to the performance of Seminole Fund and the market portfolio: $\begin{array}{lcc} & & \text { Market } \\& \text { Seminole}&\text{ Portfoli } \\\text { Average return } & 18 \% & 14 \% \\\text { Standard deviations of returns } & 30 \% & 22 \% \\\text { Beta } & 1.4 & 1.0 \\\text { Residual standard deviation } & 4.0 \% & 0.0 \%\end{array}$ The risk-free return during the sample period was 6%. Calculate the M² measure for the Seminole Fund.

Risk-adjusted mutual fund performance measures have decreased in popularity because

The comparison universe is

In a particular year, Razorback Mutual Fund earned a return of 1% by making the following investments in asset classes: $\begin{array}{lcc} & \text { Weight } & \text { Return } \\\hline \text { Bonds } & 20 \% & 5 \% \\\text { Stocks } & 80 \% & 0 \% \\\hline\end{array}$ The return on a bogey portfolio was 2%, calculated from the following information. $\begin{array}{lrrr} & & \text { Weight } & \text { Return } \\\text { Bonds (Lehman Brothers Index) } & 50 \% & 5 \%\\\text { Stocks (S\&P } 500 \text { Index) } & 50 \% & -1 \% \\\hline\end{array}$ The contribution of asset allocation across markets to the Razorback Fund's total excess return was

In a particular year, Aggie Mutual Fund earned a return of 15% by making the following investments in the following asset classes: $\begin{array}{lcr} & \text { Weight } & \text { Return } \\\hline \text { Bonds } & 10 \%& 6 \% \\\text { Stocks } & 90\% & 16 \% \\\hline\end{array}$ The return on a bogey portfolio was 10%, calculated as follows: $\begin{array}{lrrr} & \text { Weight } & \text { Return } \\\text { Bonds (Lehman Brothers Index) } & 50 \% & 5 \% \\\text { Stocks (S\&P } 500 \text { Index) } & 50 \% & 15 \% \\\hline\end{array}$ The contribution of selection within markets to total excess return was

The following data are available relating to the performance of Wildcat Fund and the market portfolio: $\begin{array} { l c c } & & { \text { Market } } \\& \text { Wildcat } & \text { Portfolio } \\\text { Average return } & 18 \% & 15 \% \\\text { Standard deviations of returns } & 25 \% & 20 \% \\\text { Beta } & 1.25 & 1.00 \\\text { Residual standard deviation } & 2 \% & 0 \%\\\end{array}$ The risk-free return during the sample period was 7%. Calculate Treynor's measure of performance for Wildcat Fund.

__________ developed a popular method for risk-adjusted performance evaluation of mutual funds.

You want to evaluate three mutual funds using the Sharpe measure for performance evaluation. The risk-free return during the sample period is 4%. The average returns, standard deviations, and betas for the three funds are given below, as are the data for the S&P 500 Index. $\begin{array}{c}\begin{array}{lll}\text { } \\\text { } \\\text { } \\\text { Fund A } \\\text { Fund B } \\\text { Fund C } \\\text { S\&P 500 } \\\end{array}\begin{array}{lll}\text { } \\\text { Average } \\\text {Return } \\18\% \\15\% \\11\% \\10\%\end{array}\begin{array}{lll}\text {}\\\text { Standand } \\\text { Deviation.} \\\text {38\% } \\\text {27\% } \\\text { 24\% } \\22\%\end{array}\begin{array}{lll}\text { } \\\text { } \\\text {Beta } \\\text { 1.6 } \\\text { 1.3 } \\\text { 1.0 } \\1.0\end{array}\end{array}$ The fund with the highest Sharpe measure is