Chapter 8 Flashcards
[1049262] Which of the following is a set of international investment performance presentation standards?
ACFAI BGIPS CAPCIM DCAPS
The correct answer is: B - GIPS
Explanation
This stands for ‘Global Investment Performance Standards’ and is from the CFA Institute.
[1049263] What is the relationship between variance and standard deviation?
AThe variance squared = standard deviation BThe square root of the standard deviation = variance squared CThe square of the standard deviation = variance DThe square root of the variance = standard deviation squared
The correct answer is: C - The square of the standard deviation = variance
Explanation
Standard deviation squared = variance
[1049265] Which of the following is not a measure of risk-adjusted performance?
ASharpe ratio BStandard deviation measure CJensen measure DTreynor ratio
The correct answer is: B - Standard deviation measure
Explanation
Standard deviation is a measure of total risk but does not measure return or risk adjusted return.
[1049268] A fund has an r-square of 42%. How should this be interpreted?
AThe fund has only achieved 42% of the return of the benchmark BThe fund has achieved 42% in excess of the return of the benchmark CThe returns of the benchmark explain 42% of the returns of the fund DThe returns of the fund are 42% down on the previous year
The correct answer is: C - The returns of the benchmark explain 42% of the returns of the fund
Explanation
The r-square measures the degree to which the fund’s returns are linked (explained by) to the benchmark’s returns. If they moved in sync the r-square would be 100. The range is from 0 to 100 with higher values indicating a stronger relationship.
[1049257] Which of the following is not a type of market index?
APrice weighted BMarket value weighted CAbsolute value weighted DEqual weighted
The correct answer is: C - Absolute value weighted
Explanation
The three weighting methods are: Price, Market Value and Equal weightings.
[1049267] Firm X has earned a positive alpha. Which of the following will be true in terms of the security market line and its value?
AThe stock would plot above the SML and is overvalued BThe stock would plot below the SML and is overvalued CThe stock would plot above the SML and is undervalued DThe stock would plot below the SML and is undervalued
The correct answer is: C - The stock would plot above the SML and is undervalued
Explanation
A stock that has an Alpha is outperforming its level of systematic risk (its Beta). So it is providing a higher return than predicted by the SML. As such it is undervalued.
Question 7
[1056997] You are the financial adviser of a new client. After carrying out a thorough fact-finding exercise, you have established that your client has strong ethical beliefs that he would like to be reflected within the portfolio you are constructing on his behalf. Your client would also like an international mix within his portfolio. In order to produce a valid benchmark to which you can compare the portfolio’s performance, which of the following is NOT an index that you might use?
AThe FTSE 4Good Index BThe FTSE KLD400 index CThe EIRIS index DThe Calvert index
The correct answer is: C - The EIRIS index
Explanation
The Ethical Investment Research Service (EIRIS) provides research and guidance to organisations and investors interested in such an investment approach. It is an organisation, not an index - though it can offer assistance to firms wishing to construct composite indices to assess performance. The other three indices mentioned are specifically designed to capture shares of companies with strong social, environmental and ethical credentials.
[1049256] Which of the following is not one of the three main ways of assessing portfolio performance?
AComparison with a similar fund managed by the same manager BComparison with similar funds from other fund managers CComparison with a relevant bond or stock market index DComparison with a custom benchmark
The correct answer is: A - Comparison with a similar fund managed by the same manager
Explanation
Benchmarks should be external to the manager rather than comparing performance to another of their own funds.
[1049261] Which of the following performance methods is also known as the internal rate of return?
ATime weighted rate of return BMoney weighted rate of return CAsset weighted rate of return DCash flow weighted rate of return
The correct answer is: B - Money weighted rate of return
Explanation
The money weighted rate of return is also known as the internal rate of return.
[1049258] Which of the following indices is/are weighted by market capitalisation?
IMSCI World Index
IIS&P 500
IIINikkei 225
AI and II BII and III CII only DI, II and III
The correct answer is: A - I and II
Explanation
The MSCI and the S&P 500 are weighted by market capitalisation. The Nikkei 225 is price weighted.
[1049266] Which of the following risk measures incorporates the beta of a firm within the calculation?
ISharpe ratio
IITreynor measure
IIIJensen measure
IVInformation ratio
AI and II BII and III CII, III and IV DII only
The correct answer is: B - II and III
Explanation
The Treynor measure and the Jensen measure look at the risk adjusted return of fully diversified portfolios. Hence they use Beta as their risk measure.
Sharpe uses standard deviation of the market (for total risk) and the information ratio used the standard deviation of excess returns.
[1049259] Which of the following indices is/are price weighted?
INikkei 225
IIMSCI World Index
IIIDow Jones Industrial Average
AI and III BII and III CI only DIII only
The correct answer is: A - I and III
Explanation
The DJIA and Nikkei 225 are price weighted. The MSCI World Index is market value weighted.
