Chapter 8: Portfolio Performance and Review

Question 1

Which of the following indices is/are weighted by market capitalisation?

I. MSCI World Index
II. S&P 500
III. Nikkei 225

A. I and II
B. II and III
C. II only
D. I, II and III

Answer 1

A. I and II.

The MSCI and the S&P 500 are weighted by market capitalisation. The Nikkei 225 is price-weighted.
The DJIA30 is also price-weighted.

Question 2

A fund has an r-square of 42%. How should this be interpreted?

A. The fund has only achieved 42% of the return of the benchmark
B. The fund has achieved 42% in excess of the return of the benchmark
C. The returns of the benchmark explain 42% of the returns of the fund
D. The returns of the fund are 42% down on the previous year

Answer 2

C. The returns of the benchmark explain 42% of the returns of the fund.

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.

Question 3

Which of the following is NOT a measure of risk-adjusted performance?

A. Sharpe ratio
B. Standard deviation measure
C. Jensen measure
D. Treynor ratio

Answer 3

B. Standard deviation is a measure of total risk but does not measure return or risk-adjusted return.

Question 4

Which of the following is a set of international investment performance presentation standards?

A. CFAI
B. GIPS
C. APCIM
D. CAPS

Answer 4

B. GIPS.

This stands for ‘Global Investment Performance Standards’ and is from the CFA Institute.

Question 5

What is the relationship between variance and standard deviation?

A. The variance squared = standard deviation
B. The square root of the standard deviation = variance squared
C. The square of the standard deviation = variance
D. The square root of the variance = standard deviation squared

Answer 5

C. The square of the standard deviation = variance.

Question 6

Firm X has earned a positive alpha. Which of the following will be true in terms of the security market line and its value?

A. The stock would plot above the SML and is overvalued
B. The stock would plot below the SML and is overvalued
C. The stock would plot above the SML and is undervalued
D. The stock would plot below the SML and is undervalued

Answer 6

C. The stock would plot above the Security Market Line (SML) and is therefore undervalued.

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

Which of the following performance methods is also known as the internal rate of return?

A. Time-weighted rate of return
B. Money-weighted rate of return
C. Asset-weighted rate of return
D. Cash flow weighted rate of return

Answer 7

B. Money-weighted rate of return.

The money-weighted rate of return is also known as the internal rate of return.

Question 8

Which of the following risk measures incorporates the beta of a firm within the calculation?

I. Sharpe ratio
II. Treynor measure
III. Jensen measure
IV. Information ratio

A. I and II
B. II and III
C. II, III and IV
D. II only

Answer 8

B. II and III.

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.