Test

Question 1

What is the alpha of a fund that has provided an average return of 12% per year, if the fund has a beta of 1.5, the return on the market was 8%, and the risk-free rate was 2%?

Select one:

a. 1.5%.
b. 2%.
c. 1%.
d. 4%.

Answer 1

Alpha = actual portfolio return - (Rf + Bi (Rm-Rf)

c. 1%.

chapter reference 11B2B

Question 2

The higher a portfolio’s Sharpe ratio, the better its:

Select one:

a. diversification.
b. risk-adjusted performance has been.
c. performance against an Exchange Traded Note.
d. performance against the benchmark.

Answer 2

Sharpe =

(Return on the investment - risk-free return) / Standard deviation of the return on the investment

b. risk-adjusted performance has been.

chapter reference 11B2A

Question 3

When looking at a Sharpe ratio, as volatility:

Select one:

a. decreases, the Sharpe ratio decreases.
b. increases, the Sharpe ratio increases.
c. decreases, the Sharpe ratio does not alter.
d. increases, the Sharpe ratio decreases.

Answer 3

Sharpe =

(Return on the investment - risk-free return) / Standard deviation of the return on the investment

d. increases, the Sharpe ratio decreases.

chapter reference 11B2A

Question 4

When measuring the performance of a fund using the time-weighted rate of return, it:

Select one:

a. does not consider the valuation of the portfolio when an addition to the fund is made.
b. should be used for comparison purposes.
c. takes the timing of withdrawals into account.
d. is always higher than money-weighted return.

Answer 4

b. should be used for comparison purposes.

chapter reference 11B1C

Question 5

George invested £30,000 at the start of the year. At the end of the year his investment was worth £45,000. He had received income of £900 on the investment during the year. What is the holding period return on his investment?

Select one:

a. 50%.
b. 53%.
c. 35%.
d. 25%.

Answer 5

b. 53%.

chapter reference 11B1A

Question 6

Stuart invested £60,000 at the start of the year but withdrew £20,000 after 6 months. He earned income on his investment of £750 and at the end of the year his investment was worth £42,000. What is the money-weighted rate of return on his investment?

Select one:

a. 5%.
b. 5.5%.
c. 4%.
d. 4.5%.

Answer 6

b. 5.5%.

chapter reference 11B1B

Question 7

A given benchmark had 40% in equities and equities performed at 20%. This shows that:

Select one:

a. equities gave an 8% contribution to return.
b. an active fund would have performed better than the benchmark.
c. the benchmark return was positive.
d. the benchmark return was negative.

Answer 7

a. equities gave an 8% contribution to return.

chapter reference 11C

Question 8

When measuring the performance of a portfolio over a period of time, an investor uses a formula that seeks to minimise the distortion of the timing of new monies that are added to the fund. He has calculated the:

Select one:

a. Sharpe ratio.
b. time-weighted return.
c. money-weighted return.
d. standard deviation.

Answer 8

b. time-weighted return.

chapter reference 11B1C

Question 9

An investment portfolio has an annualised rate of return of 10% compared to a 4% annual return from a risk-free investment. The standard deviation of the portfolio is 8%. What is the Sharpe ratio?

Select one:

a. 0.75.
b. 4.
c. 8.
d. 10.

Answer 9

Sharpe =

(Return on the investment - risk-free return) / Standard deviation of the return on the investment

a. 0.75.

chapter reference 11B2A

Question 10

Which statement is correct regarding the time-weighted rate of return?

Select one:

a. It always returns a higher figure than the money-weighted rate of return and so is preferred by fund managers.
b. It is not as accurate as the money-weighted measure.
c. It is a fairer measure of the skill of the fund manager compared with the money-weighted rate of return.
d. It ignores inflows and outflows so is a ‘purer’ measure.

Answer 10

c. It is a fairer measure of the skill of the fund manager compared with the money-weighted rate of return.

chapter reference 11B1C

Question 11

Portfolio managers achieve good or bad results by the exercise of:

You must select ALL the correct options to gain the mark:

a. minimalisation theory.
b. risk.
c. due diligence.
d. stock selection.
e. ethical screening.

Answer 11

b. risk.
d. stock selection.

chapter reference 11C

Question 12

Indicators that a fund manager is performing well would be:

You must select ALL the correct options to gain the mark:

a. negative alpha.
b. positive alpha.
c. negative information ratio.
d. beta greater than 1.
e. positive information ratio.

Answer 12

b. positive alpha.
e. positive information ratio.

chapter reference 11B

Question 13

Performance attribution:

You must select ALL the correct options to gain the mark:

a. is useful in terms of evaluating the contribution to the return of a portfolio due to stock selection.
b. can show up underperformance in terms of asset allocation decisions.
c. requires the use of an appropriate benchmark.
d. is a forward looking measure.
e. is not suitable for use in active portfolios.

Answer 13

a. is useful in terms of evaluating the contribution to the return of a portfolio due to stock selection.
b. can show up underperformance in terms of asset allocation decisions.
c. requires the use of an appropriate benchmark.

chapter reference 11C

Question 14

The information ratio is applied to evaluate the performance of a fund manager whose average portfolio return is 7% compared with the benchmark return of 11%. The tracking error is 5%. This analysis indicates that the:

You must select ALL the correct options to gain the mark:

a. fund manager is likely to have outperformed the average comparable fund.
b. investor would probably have achieved better returns by using a tracker fund.
c. risk-adjusted return is deemed to be negative.
d. fund manager is more likely to have a passive fund management approach than an active approach.
e. fund returned in excess of the risk-free rate.

Answer 14

Information Ratio = (Portfolio Return - Benchmark Return) / Tracking Error

(7-11) / 5 = -0.8

b. investor would probably have achieved better returns by using a tracker fund.
c. risk-adjusted return is deemed to be negative.

chapter reference 11B2C

Question 15

Henry, a fund manager, is able to achieve positive returns by the exercise of all the following EXCEPT:

Select one:

a. selecting the asset allocation for the fund.
b. taking tactical decisions to take more or less risk.
c. deciding on when to introduce or withdraw funds.
d. selecting the fund measurement benchmark.

Answer 15

d. selecting the fund measurement benchmark.

chapter reference 11C

Question 16

Ronnie is using the declared ‘alpha’ to review the performance of his portfolio. He should be aware that:

You must select ALL the correct options to gain the mark:

a. the alpha of a fund is independent of the fund’s beta value.
b. in some cases a negative alpha can result from the effect of fund management expenses.
c. a negative alpha indicates a positive return.
d. it is the return explained by the capital asset pricing model.
e. it is a measure of a fund manager’s stock-picking skills.

Answer 16

b. in some cases a negative alpha can result from the effect of fund management expenses.
e. it is a measure of a fund manager’s stock-picking skills.

chapter reference 11B2B

Question 17

When comparing the money-weighted rate of return [MWR] and the time-weighted rate of return [TWR], the:

You must select ALL the correct options to gain the mark:

a. MWR measures the overall return on capital invested over a specific period.
b. MWR is appropriate for evaluating and comparing different portfolios.
c. TWR is universally used for comparative purposes.
d. MWR is not influenced by the timing of cash flows.
e. TWR attempts to eliminate the distortions caused by the timing of new money.

Answer 17

a. MWR measures the overall return on capital invested over a specific period.
c. TWR is universally used for comparative purposes.
e. TWR attempts to eliminate the distortions caused by the timing of new money.

chapter reference 11B1

Question 18

In respect of the information ratio, it is correct to say that:

You must select ALL the correct options to gain the mark:

a. a negative result indicates that a tracker fund has performed better.
b. it reflects the investment manager’s degree of out-performance.
c. it can be positive or negative.
d. it is dependent on the value of a risk-free asset.
e. the larger the tracking error, the smaller the information ratio.

Answer 18

a. a negative result indicates that a tracker fund has performed better.
c. it can be positive or negative.
e. the larger the tracking error, the smaller the information ratio.

chapter reference 11B2C

Question 19

Albert is confused about the values used for various investment ratios. Which has he understood correctly?

You must select ALL the correct options to gain the mark:

a. The Sharpe ratio does not include the return on the benchmark.
b. Beta is used in the information ratio amongst other things.
c. The Sharpe ratio includes the return on the portfolio, the risk-free rate and beta.
d. Jensen’s alpha includes the standard deviation of the portfolio in its formula.
e. The information ratio includes tracking error amongst other things.

Answer 19

a. The Sharpe ratio does not include the return on the benchmark.
e. The information ratio includes tracking error amongst other things.

chapter reference 11B

Question 20

What does it mean if a fund returns an average of 11% per year, compared with a benchmark return of 9%, and has a tracking error of 5%?

You must select ALL the correct options to gain the mark:

a. If the performance of both the fund and the benchmark were 2% higher, the information ratio would remain the same.
b. The fund’s information ratio is 0.4.
c. The relative return achieved by the fund manager is 6%.
d. The fund manager has, on a risk-adjusted basis, outperformed the market.
e. Better returns could probably be achieved by using a tracker fund.

Answer 20

Information Ratio = (Portfolio Return - Benchmark Return) / Tracking Error

(11-9) / 5 = 0.4

a. If the performance of both the fund and the benchmark were 2% higher, the information ratio would remain the same.
b. The fund’s information ratio is 0.4.
d. The fund manager has, on a risk-adjusted basis, outperformed the market.

chapter reference 11B2/11B2C

Question 21

Risk-adjusted returns can be measured using:

You must select ALL the correct options to gain the mark:

a. the information ratio.
b. beta.
c. the time-weighted rate of return.
d. the money-weighted rate of return.
e. Jensen’s alpha.

Answer 21

a. the information ratio.
e. Jensen’s alpha.

chapter reference 11B2

Question 22

The information ratio is a useful measure of a portfolio’s performance because it:

You must select ALL the correct options to gain the mark:

a. adjusts the performance measurement by a risk factor.
b. shows the consistency with which a manager beats a benchmark index.
c. takes into account the relative concentration of the various asset classes.
d. includes a factor for fund manager experience.
e. measures returns over the risk-free rate.

Answer 22

a. adjusts the performance measurement by a risk factor.
b. shows the consistency with which a manager beats a benchmark index.

chapter reference 11B2C

Question 23

A fund manager generates a return of 12%, with the benchmark return being 11%. If the risk-free return is 2.5% and the portfolio has a standard deviation of 7%, the Sharpe ratio is:

Select one:

a. 2.20.
b. 1.36.
c. 1.79.
d. 2.

Answer 23

Sharpe =

(Return on the investment - risk-free return) / Standard deviation of the return on the investment

(12-2.5) / 7 = 1.36

b. 1.36.

chapter reference 11B2A

Question 24

Risk-adjusted returns can be measured using:

You must select ALL the correct options to gain the mark:

a. the information ratio.
b. the Sharpe ratio.
c. Beta.
d. Alpha.

Answer 24

a. the information ratio.
b. the Sharpe ratio.
d. Alpha.

chapter reference 11B2

Question 25

In order to calculate the money-weighted return for an investment, it is important to take account of:

Select one:

a. any income or withdrawals.
b. the risk-free rate of return.
c. the tax status of the investor.
d. the percentage held in risk-free assets.

Answer 25

a. any income or withdrawals.

chapter reference 11B1B

Question 26

Measures of the volatility of a portfolio’s return include its:

You must select ALL the correct options to gain the mark:

a. time-weighted rate of return.
b. standard deviation.
c. Sharpe ratio.
d. beta.
e. money-weighted rate of return.

Answer 26

b. standard deviation.
d. beta.

chapter reference 11B2

Question 27

Which key issues should be taken into account when evaluating the performance of an investment manager?

You must select ALL the correct options to gain the mark:

a. How the returns were achieved.
b. Comparison with their peers.
c. Turnover of key individuals.
d. Value added relative to benchmark.
e. Recent categorisation by the regulator.

Answer 27

a. How the returns were achieved.
b. Comparison with their peers.
d. Value added relative to benchmark.

chapter reference 11B

Question 28

Portfolio A generates a return of 12% and the portfolio has a standard deviation of 10%. Portfolio B generates a return of 9% and the portfolio has a standard deviation of 5%. If the risk free return is 4%:

You must select ALL the correct options to gain the mark:

a. portfolio B is likely to be a tracker fund.
b. portfolio A has the best risk-adjusted performance.
c. portfolio A has a Sharpe ratio of 0.8.
d. the manager of portfolio A has taken more investment risk than the manager of portfolio B.
e. portfolio B has a Sharpe ratio of 1.

Answer 28

Sharpe = (Return on the investment - risk-free return) / Standard deviation of the return on the investment

Portfolio A Sharpe = (12 - 4) / 10 = 0.8

Portfolio B Sharpe = (9 - 4) / 5 = 1

c. portfolio A has a Sharpe ratio of 0.8.
d. the manager of portfolio A has taken more investment risk than the manager of portfolio B.
e. portfolio B has a Sharpe ratio of 1.

chapter reference 11B2A

Question 29

The asset allocation for a benchmark fund includes 40% UK equities, 30% overseas equities, and 30% fixed interest. To calculate the contribution of overseas equities alone to the overall performance of the fund, knowledge is required of the:

You must select ALL the correct options to gain the mark:

a. performance of each group of overseas shares in relation to their local index.
b. performance of the FTSE All-World index over the period.
c. contributions of both the UK equities and the fixed interest to the overall return of the fund.
d. weighting of each individual overseas market.
e. indices used for all of the assets classes included in the fund.

Answer 29

a. performance of each group of overseas shares in relation to their local index.
d. weighting of each individual overseas market.

chapter reference 11C

Question 30

Liz is reviewing the performance of her portfolio, using the Sharpe ratio of each holding to do so. She should be aware that:

You must select ALL the correct options to gain the mark:

a. it will show the return expected from a security, given its beta, and the return it has actually produced.
b. the lower the Sharpe ratio, the more the investment can be said to compensate the investor for the risk taken.
c. a positive Sharpe ratio indicates that a risk-free asset would have performed better than the investment being analysed.
d. it will show the fund’s risk-adjusted performance.
e. the higher the Sharpe ratio, the greater the fund manager can be said to have added value.

Answer 30

d. it will show the fund’s risk-adjusted performance.
e. the higher the Sharpe ratio, the greater the fund manager can be said to have added value.

chapter reference 11B2A

Question 31

When calculating the money-weighted return of a portfolio, it is necessary to take into account:

You must select ALL the correct options to gain the mark:

a. sub-periods between the addition or withdrawal of capital.
b. capital added to or taken from the portfolio.
c. the value of the portfolio at the start of the period.
d. the alpha of the portfolio.
e. the income paid out to the investor during the period.

Answer 31

b. capital added to or taken from the portfolio.
c. the value of the portfolio at the start of the period.
e. the income paid out to the investor during the period.

chapter reference 11B1B

Question 32

Active portfolio managers mainly achieve their returns by the exercise of good:

You must select ALL the correct options to gain the mark:

a. index tracking.
b. market timing.
c. cost reduction.
d. stock selection.
e. asset allocation.

Answer 32

b. market timing.
d. stock selection.
e. asset allocation.

chapter reference 11C

Question 33

The asset allocation for a benchmark fund includes 60% UK equities, 35% fixed interest and 5% cash. If the indices for these assets perform at 15%, 10% and 5% respectively:

You must select ALL the correct options to gain the mark:

a. the model rate of return for equities is 4%.
b. the contribution of the cash to the overall return is 2.5%.
c. the inclusion of overseas equities would increase the return of the benchmark fund.
d. the model rate of return for equities is 9%.
e. replicating the benchmark fund asset allocation, and tracking the appropriate indices for each class of asset, would return 12.75%.

Answer 33

d. the model rate of return for equities is 9%.
e. replicating the benchmark fund asset allocation, and tracking the appropriate indices for each class of asset, would return 12.75%.

chapter reference 11C

Question 34

A fund has a beta of 0.8 and a standard deviation of 9. The annual return on the market is 7% and the risk-free rate returns 2% per annum. The fund returned 6.5% in the past year. The:

You must select ALL the correct options to gain the mark:

a. Sharpe ratio of the fund is higher than its alpha.
b. fund manager has, on a risk-adjusted basis, outperformed the market.
c. fund returned a negative alpha.
d. alpha of the fund is lower than its beta.
e. fund is less volatile than the market.

Answer 34

d. alpha of the fund is lower than its beta.
e. fund is less volatile than the market.

Correct, chapter reference 11B

Question 35

Which rates of return are the most common ways of calculating the return from a portfolio?

You must select ALL the correct options to gain the mark:

a. Investment-weighted.
b. Money-weighted.
c. Performance-weighted.
d. Return-weighted.
e. Time-weighted.

Answer 35

b. Money-weighted.
e. Time-weighted.

Correct, chapter reference 11B1

Question 36

A client invested £80,000 at the start of the year and withdrew £20,000 after 6 months when the portfolio was worth £85,000. The value was £70,000 at the end of the year. The index went up by 10% during the year. This indicates that:

You must select ALL the correct options to gain the mark:

a. based on the time-weighted rate of return, the fund manager produced positive alpha.
b. the client improved the performance of the fund by withdrawing money when he did.
c. the money-weighted rated of return was lower than the return on the index.
d. the money-weighted rate of return was lower than the time-weighted rate of return.

Answer 36

a. based on the time-weighted rate of return, the fund manager produced positive alpha.
d. the money-weighted rate of return was lower than the time-weighted rate of return.

chapter reference 11B1

Question 37

Investment A has a Sharpe ratio of 0.9 and investment B has a Sharpe ratio of 1.25. This would indicate that:

You must select ALL the correct options to gain the mark:

a. investment B offers a better level of return for the risk taken.
b. a risk-free asset would have performed better than investment A.
c. investment B returned 35% more than investment A.
d. if the risk-free ratio was 2% and the standard deviation of investment A was 3.33% then it must have returned 5%.
e. investment A has taken less risk than investment B.

Answer 37

a. investment B offers a better level of return for the risk taken.
d. if the risk-free ratio was 2% and the standard deviation of investment A was 3.33% then it must have returned 5%.

Correct, chapter reference 11B2A

Question 38

When looking at the investment performance of a fund, it would be desirable to see a:

You must select ALL the correct options to gain the mark:

a. high time-weighted rate of return.
b. positive alpha.
c. negative information ratio.
d. relatively low Sharpe ratio.
e. high tracking error.

Answer 38

a. high time-weighted rate of return.
b. positive alpha.

chapter reference 11B

Question 39

Time-weighted rate of return is a good way to evaluate the:

You must select ALL the correct options to gain the mark:

a. fund manager’s performance.
b. outperformance of the portfolio when compared against its benchmark.
c. risk-adjusted return of a portfolio.
d. client’s good timing.

Answer 39

a. fund manager’s performance.
b. outperformance of the portfolio when compared against its benchmark.

chapter reference 11B1C

Question 40

The return achieved by a portfolio manager is primarily determined by their use of:

You must select ALL the correct options to gain the mark:

a. stock selection.
b. past performance.
c. economic forecasts.
d. optimisation.
e. market timing.

Answer 40

a. stock selection.
e. market timing.

chapter reference 11C

Question 41

Performance evaluation focuses on:

You must select ALL the correct options to gain the mark:

a. making a judgment about the most suitable future asset classes.
b. maximising the investment return whilst minimising the volatility.
c. how the investment return was achieved.
d. the actual investment return over a stated period.
e. the added value achieved relative to the benchmark.

Answer 41

c. how the investment return was achieved.
e. the added value achieved relative to the benchmark.

chapter reference 11B

Question 42

Portfolio A has an annualised return of 12% and a standard deviation of 9%. Portfolio B has an annualised return of 10% and a standard deviation of 5%. If the annual return from a risk-free investment is 4%, this would indicate that:

You must select ALL the correct options to gain the mark:

a. portfolio B has a lower Sharpe ratio than portfolio A.
b. the fund manager of portfolio A has achieved a higher return on a risk-adjusted basis.
c. portfolio B has a Sharpe ratio of 1.2.

Correct, chapter reference 11B2A

d. the fund manager of portfolio A has taken more risk than the fund manager of portfolio B.

Correct, chapter reference 11B2A

Answer 42

c. portfolio B has a Sharpe ratio of 1.2.
d. the fund manager of portfolio A has taken more risk than the fund manager of portfolio B.

Correct, chapter reference 11B2A

Question 43

If alpha is used to review the performance of a portfolio, an adviser should be aware that:

You must select ALL the correct options to gain the mark:

a. it is the return explained by the capital asset pricing model.
b. it cannot be used with fixed-interest funds.
c. a negative alpha can result from the effect of fund management expenses.
d. it is an indication of added value.
e. it measures the excess return for every unit of risk taken.

Answer 43

c. a negative alpha can result from the effect of fund management expenses.
d. it is an indication of added value.

chapter reference 11B2B

Question 44

Sasha is attempting to evaluate the performance of Don, her investment manager. The key issues that Sasha should take into account are the:

You must select ALL the correct options to gain the mark:

a. money-weighted rate of return.
b. liability for capital gains tax from the portfolio.
c. total funds under management.
d. levels of risk Don took to achieve the returns.

Correct, chapter reference 11B

e. value Don added relative to the chosen benchmark.

Correct, chapter reference 11B

Answer 44

d. levels of risk Don took to achieve the returns.
e. value Don added relative to the chosen benchmark.

Correct, chapter reference 11B

Question 45

Performance attribution can identify where the fund manager has delivered outperformance due to:

You must select ALL the correct options to gain the mark:

a. stock selection.
b. the suitability of the benchmark.
c. good fortune.
d. asset allocation.
e. sector choice.

Answer 45

a. stock selection.
d. asset allocation.
e. sector choice.

chapter reference 11C

Question 46

A Sharpe ratio of 2.2 for a fund indicates that:

You must select ALL the correct options to gain the mark:

a. if the fund had performed marginally better than cash, then volatility must have been extremely high.
b. equities have been the best performing asset class.
c. the fund has performed better than cash.
d. the fund has performed better than a relative benchmark.
e. if the fund had performed marginally better than cash, then volatility must have been extremely low.

Answer 46

c. the fund has performed better than cash.
e. if the fund had performed marginally better than cash, then volatility must have been extremely low.

chapter reference 11B2A

Question 47

A client calculated that his money-weighted rate of return was 9% whilst the time-weighted return was 6%. The index returned 7%. This means that the:

You must select ALL the correct options to gain the mark:

a. timing of the client was poor.
b. client did not introduce or take money out of the portfolio during the year.
c. fund manager produced negative alpha.
d. outperformance was primarily down to the client not the fund manager.

Answer 47

c. fund manager produced negative alpha.
d. outperformance was primarily down to the client not the fund manager.

chapter reference 11B

Question 48

A client has invested money at the start of the year and has not touched the capital nor received any income during the year. This would indicate that the:

You must select ALL the correct options to gain the mark:

a. time-weighted return and the holding period return will be a good measure of the fund manager’s performance.
b. holding period return and the time-weighted rate of return will always be the same.
c. holding period return will always be lower than if he had added more money halfway through the period.
d. holding period return will be the same as the money-weighted rate of return.

Answer 48

a. time-weighted return and the holding period return will be a good measure of the fund manager’s performance.
d. holding period return will be the same as the money-weighted rate of return.

chapter reference 11B1

Question 49

An investment portfolio has a beta of 0.9, a standard deviation of 8% and an annualised return of 9%. The annual return on the market was 10% and there was a 2% annual return from a risk-free investment. This indicates that:

You must select ALL the correct options to gain the mark:

a. the fund was more volatile than the market.
b. the fund produced positive alpha.
c. there was a positive Sharpe ratio.
d. the fund was expected to return 9.2% under CAPM.
e. the Sharpe ratio was lower than its beta.

Answer 49

c. there was a positive Sharpe ratio.
d. the fund was expected to return 9.2% under CAPM.
e. the Sharpe ratio was lower than its beta.

chapter reference 11B2A

Question 50

When using the money-weighted rate of return to calculate the return from a portfolio, an adviser should be aware that:

You must select ALL the correct options to gain the mark:

a. the calculation can be modified to allow for any new funds which are invested during the year.
b. income and capital distributions made from the portfolio are not taken into account.
c. the investment industry refers to it as the internal rate of return.
d. it measures the overall return on capital invested over a specific period.
e. reinvested income must be taken into account in the calculation.

Answer 50

a. the calculation can be modified to allow for any new funds which are invested during the year.
c. the investment industry refers to it as the internal rate of return.
d. it measures the overall return on capital invested over a specific period.

chapter reference 11B1B

Question 51

Pavlos has been told by his adviser about the importance of a stock’s ‘alpha’. In particular, a:

Select one:

a. negative alpha indicates the stock has performed better than other investments in the client’s portfolio.
b. negative alpha indicates the stock has performed worse than other investments in the client’s portfolio.
c. positive alpha indicates the stock has performed worse that its beta predicted.
d. positive alpha indicates the stock has performed better than its beta predicted.

Answer 51

d. positive alpha indicates the stock has performed better than its beta predicted.

chapter reference 11B2B

Question 52

When using beta to measure the volatility of individual securities, a financial adviser should be aware that:

You must select ALL the correct options to gain the mark:

a. a security with a beta of less than 1 but more than zero is more volatile than the market.
b. it allows the adviser to quantify the value added or taken away by a manager through active management.
c. a security with a beta of 1 will move up and down broadly with the market.
d. a security with a beta of more than 1 is perfectly correlated with the market.
e. it measures volatility relative to the market as a whole.

Answer 52

c. a security with a beta of 1 will move up and down broadly with the market.
e. it measures volatility relative to the market as a whole.

chapter reference 11A1

Question 53

Sally’s adviser has explained to her the impact that the time-weighted rate of return will have on her investments. However, the information her adviser provided wasn’t entirely accurate. Which statement made by the adviser is INCORRECT?

Select one:

a. “I establish the time-weighted return by compounding the returns for each period.”
b. “You can’t use the time-weighted return to compare me to another fund manager.”
c. “Time-weighted returns attempt to eliminate distortions caused by the introduction of new money to an investment.”
d. “I’ll look to revalue the portfolio every time there is an in-flow or out-flow of cash to or from your investment.”

Answer 53

b. “You can’t use the time-weighted return to compare me to another fund manager.”

chapter reference 11B1C

Question 54

An adviser is using the information ratio to assess the risk-adjusted performance of a discretionary portfolio. It would be INCORRECT to say that:

Select one:

a. it is calculated by dividing the relative return of the fund by the tracking error.
b. it shows the consistency with which a fund manager beats a benchmark index.
c. it is used to assess the risk-adjusted performance of active fund managers.
d. it indicates that less value is being added through active management if the information ratio is higher.

Answer 54

d. it indicates that less value is being added through active management if the information ratio is higher.

chapter reference 11B2C

Question 55

A client invested £200,000 at the start of the year and added £50,000 after 6 months when the portfolio was worth £180,000. The value at the end of the year was £300,000. If the index went up by 15% during the year, this would indicate that:

You must select ALL the correct options to gain the mark:

a. based on the time-weighted rate of return, the fund manager produced positive alpha.
b. the client reduced the performance of the fund by adding money when he did.
c. the money-weighted rated of return was higher than the return on the index.

Correct, chapter reference 11B1

d. the money-weighted rate of return was higher than the time-weighted rate of return.

Correct, chapter reference 11B1

Answer 55

a. based on the time-weighted rate of return, the fund manager produced positive alpha.
c. the money-weighted rated of return was higher than the return on the index.
d. the money-weighted rate of return was higher than the time-weighted rate of return.

chapter reference 11B1

Question 56

The performance of an existing portfolio is being compared with its benchmark. The asset allocation of the benchmark is 60% UK equities, 30% overseas equities, 5% fixed interest and 5% cash. If the performance of these assets over the period was 15%, 13%, 3% and 2% respectively, this means that the return of:

You must select ALL the correct options to gain the mark:

a. UK equities would be 9% in this benchmark portfolio.

Correct, chapter reference 11C

b. UK equities would be 8.7% in this benchmark portfolio.
c. overseas equities would be 3.9% in this benchmark portfolio.

Correct, chapter reference 11C

d. fixed interest would be 9.5% in this benchmark portfolio.
e. cash would be 1.5% in this benchmark portfolio.

Answer 56

a. UK equities would be 9% in this benchmark portfolio.
c. overseas equities would be 3.9% in this benchmark portfolio.

chapter reference 11C

Question 57

Wayne wants to use risk-adjusted measurements of the return on the funds within his portfolio. Which measurements would enable him to do so?

You must select ALL the correct options to gain the mark:

a. Money-weighted rate of return.
b. Information ratio.
c. Sharpe ratio.
d. Time-weighted rate of return.

Answer 57

b. Information ratio.
c. Sharpe ratio.

chapter reference 11B2

Question 58

When calculating the money-weighted return of a portfolio, this would take into account:

You must select ALL the correct options to gain the mark:

a. the value of the portfolio at the start of the period.
b. the value of the portfolio at the end of the period.
c. the cash flow of the investment.
d. the risk-free rate of return.
e. an appropriate benchmark index.

Answer 58

a. the value of the portfolio at the start of the period.
b. the value of the portfolio at the end of the period.
c. the cash flow of the investment.

chapter reference 11B1B