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Exam 24: Portfolio Performance Evaluation

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Question 31

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Hedge funds I) are appropriate as a sole investment vehicle for an investor. II. should only be added to an already well-diversified portfolio. III. pose performance-evaluation issues due to nonlinear factor exposures. IV. have down-market betas that are typically larger than up-market betas. V. have symmetrical betas.

A) I only
B) II and V
C) I, III, and IV
D) II, III, and IV
E) I, III, and V

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Question 32

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Morningstar's RAR method I) is one of the most widely-used performance measures. II. indicates poor performance by placing up to 5 darts next to the fund's name. III. computes fund returns adjusted for loads. IV) computes fund returns adjusted for risk. V. produces ranking results that are the same as those produced with the Sharpe measure.

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

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Question 33

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Suppose you purchase 100 shares of GM stock at the beginning of year 1 and purchase another 100 shares at the end of year 1. You sell all 200 shares at the end of year 2. Assume that the price of GM stock is $50 at the beginning of year 1, $55 at the end of year 1, and $65 at the end of year 2. Assume no dividends were paid on GM stock. Your dollar-weighted return on the stock will be __________ your time-weighted return on the stock.

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 are the data for the S&P 500 Index. $\begin{array}{c}\begin{array}{lll}\text { } \\\text { } \\\text { } \\\text { Fund A } \\\text { Fund B } \\\text { Fund C } \\\text { S\&P 500 } \\\end{array}\begin{array}{lll}\text { } \\\text { Average } \\\text {Return } \\24\% \\21\% \\22\% \\18\%\end{array}\begin{array}{lll}\text {}\\\text { Standand } \\\text { Deviation.} \\\text {30\% } \\\text {10\% } \\\text { 20\% } \\16\%\end{array}\begin{array}{lll}\text { } \\\text { } \\\text {Beta } \\\text { 1.5 } \\\text { 0.5 } \\\text { 1.0 } \\1.0\end{array}\end{array}$ The fund with the highest Sharpe measure is

The following data are available relating to the performance of Long Horn Stock Fund and the market portfolio: $\begin{array} { l c c } & & \text { Market } \\& \text { Long Horn}& \text { Portfolio } \\\text { Average return } & 19 \% & 12 \% \\\text { Standard deviations of returns } & 35 \% & 15 \% \\\text { Beta } & 1.5 & 1.0 \\\text { Residual standard deviation } & 3.0 \% & 0.0 \% \\\end{array}$ The risk-free return during the sample period was 6%. What is the Treynor measure of performance evaluation for Long Horn Stock Fund?

The following data are available relating to the performance of Sooner Stock Fund and the market portfolio: $\begin{array}{lcc} & & \text { Market } \\ & \text { Sooner } & \text { Portfolio } \\\text { Average return } & 20 \% & 11 \% \\\text { Standard deviations of returns }& 44 \% & 19\% \\\text { Beta } & 1.8 & 1.0 \\\text { Residual standard deviation } & 2.0\% & 0.0\%\end{array}$ The risk-free return during the sample period was 3%. What is the Sharpe measure of performance evaluation for Sooner Stock Fund?

Mutual funds show ____________ evidence of serial correlation, and hedge funds show ____________ evidence of serial correlation.

Suppose two portfolios have the same average return and the same standard deviation of returns, but Aggie Fund has a higher beta than Raider Fund. According to the Sharpe measure, the performance of Aggie Fund

Suppose two portfolios have the same average return and the same standard deviation of returns, but Buckeye Fund has a lower beta than Gator Fund. According to the Sharpe measure, the performance of Buckeye Fund

Suppose two portfolios have the same average return and 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

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%. What is the information ratio measure of performance evaluation for Monarch Stock Fund?

Suppose two portfolios have the same average return and the same standard deviation of returns, but portfolio A has a lower beta than portfolio B. According to the Treynor measure, the performance of portfolio A

The following data are available relating to the performance of Long Horn Stock Fund and the market portfolio: $\begin{array} { l c c } & & \text { Market } \\& \text { Long Horn}& \text { Portfolio } \\\text { Average return } & 19 \% & 12 \% \\\text { Standard deviations of returns } & 35 \% & 15 \% \\\text { Beta } & 1.5 & 1.0 \\\text { Residual standard deviation } & 3.0 \% & 0.0 \% \\\end{array}$ The risk-free return during the sample period was 6%. Calculate the information ratio for Long Horn Stock Fund.

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

The following data are available relating to the performance of Sooner Stock Fund and the market portfolio: $\begin{array}{lcc} & & \text { Market } \\ & \text { Sooner } & \text { Portfolio } \\\text { Average return } & 20 \% & 11 \% \\\text { Standard deviations of returns }& 44 \% & 19\% \\\text { Beta } & 1.8 & 1.0 \\\text { Residual standard deviation } & 2.0\% & 0.0\%\end{array}$ The risk-free return during the sample period was 3%. What is the Treynor measure of performance evaluation for Sooner Stock Fund?

In a particular year, Aggie Mutual Fund earned a return of 15% by making the following investments in the following asset classes: $\begin{array}{lcc} & \text { Weight } & \text { Return } \\\hline \text { Bonds } & 10 \% & 6 \% \\\text { Stocks } & 90 \%& 16 \%\\\hline\end{array}$ 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 total excess return on the Aggie managed portfolio was

You want to evaluate three mutual funds using the information ratio measure for performance evaluation. The risk-free return during the sample period is 6%, and the average return on the market portfolio is 19%. The average returns, residual standard deviations, and betas for the three funds are given below. $\begin{array}{c}\begin{array}{lll}\text { } \\\text { } \\\text { } \\\text { Fund A } \\\text { Fund B } \\\text { Fund C } \\\end{array}\begin{array}{lll}\text { } \\\text { Average } \\\text {Return } \\20\% \\21\% \\23\% \\\end{array}\begin{array}{lll}\text {Residual } \\\text { Standand } \\\text { Deviation.} \\\text {4.00\% } \\\text {1.25\% } \\\text { 1.20\% } \\\end{array}\begin{array}{lll}\text { } \\\text { } \\\text {Beta } \\\text { 0.8 } \\\text { 1.0 } \\\text { 1.2 } \\\end{array}\end{array}$ The fund with the highest information ratio measure is

A pension fund that begins with $500,000 earns 15% the first year and 10% the second year. At the beginning of the second year, the sponsor contributes another $300,000. The dollar-weighted and time-weighted rates of return, respectively, were

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 asset allocation across markets to the 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%. What is the information ratio measure of performance evaluation for Wildcat Fund?