Investment Risk and Performance Quiz

Assume that an investor is only concerned with systematic risk. Which of the following would be the best measure to use to rank order funds with different betas based on their risk-return relationship with the market portfolio?

• Treynor ratio

• Sharpe ratio

• Jensen's alpha

• Sortino ratio

Suppose the S&P 500 Index has an expected annual return of 7.6% and volatility of 10.8%. Suppose the Atlantis Fund has an expected annual return of 7.2% and volatility of 8.8% and is benchmarked against the S&P 500 Index. If the risk-free rate is 2.0% per year, what is the beta of the Atlantis Fund according to the CAPM?

• 0.81

• 0.93

• 1.13

• 1.23

An analyst is evaluating the performance of a portfolio of Mexican equities that is benchmarked to the IPC Index. The analyst collects the information about the portfolio and the benchmark index, shown below:

Expected return on the portfolio 8.7%

Volatility of returns on the portfolio 12.0%

Expected return on the IPC Index 4.0%

Volatility of returns on the IPC Index 8.7%

Risk-free rate of return 2%

Beta of portfolio relative to IPC Index 1.4

What is the Sharpe ratio for this portfolio?

• 0.036

• 0.047

• 0.389

• 0.558

The efficient frontier is defined by the set of portfolios that, for each volatility level, maximizes the expected return. According to the CAPM, which of the following statements is correct with respect to the efficient frontier?

• The capital market line always has a positive slope and its steepness depends upon market risk premium and volatility of the portfolio

• The capital market line is the straight line connecting the risk-free asset with the zero beta minimum variance portfolio.

• Investors with the lowest risk aversion will typically hold the portfolio of risky assets that has the lowest standard deviation on the efficient frontier.

• The efficient frontier allows different individuals to have different portfolios of risky assets based upon their individual forecasts for asset returns.

An analyst is analyzing the historical performance of two commodity funds tracking the Reuters/Jefferies-CRB Index as benchmark. The analyst collated the data on the monthly returns and decided to use the information ratio (IR) to assess which fund achieved higher returns more efficiently and presented the findings.

• A

• B

• C

• D

Jenny Rouse has been a portfolio manager for Theta Advisors for the last five years. The performance of her portfolio has had few returns below its benchmarks since its inception. Which of the following risk measures best measures Rouse's performance?

• Sharpe ratio.

• Standard Deviation.

• Range

• Sortino ratio.

Jim Sheehan manages a diversified portfolio containing forty stocks. The portfolio beta is 1.05. Jim is considering adding the stock of ABC Inc. to the portfolio, and would fund the purchase with cash already in the portfolio. ABC Inc. has a beta of 1.20, and is currently not part of the portfolio. Which statement about the resulting portfolio is true?

• Both systematic risk and unsystematic risk would both increase.

• Systematic risk would increase, but the unsystematic risk may be unchanged

• Both systematic risk and unsystematic risk would be unchanged.

• Systematic risk would decrease, but the unsystematic risk would be unchanged.

Which of the following measures used to evaluate the performance of a portfolio manager is (are) not subject to the assumptions of the capital asset pricing model (CAPM)?

• Jensen's alpha and the Treynor measure.

• Jensen's alpha.

• Sharpe measure.

• Treynor measure.

Which of the following statements about the security market line (SML) is least accurate?

• The risk-free rate defines where the SML intersects the vertical axis.

• Securities that plot above the SML are undervalued.

• The market portfolio consists of all risky assets.

• Securities that plot on the SML have no intrinsic value to the investor.

Jensen's alpha for a portfolio measures the:

• difference between the fund's Sharpe ratio and Treynor measure

• difference between a fund's return and the market return.

• fund's return in excess of the required rate of return given the unsystematic risk of the portfolio.

• fund's return in excess of the required rate of return given the systematic risk of the portfolio.