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Exam 24: Portfolio Performance Evaluation

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Question 1

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The following data are available relating to the performance of Sooner Stock Fund and the market portfolio: The risk-free return during the sample period was 3%. Calculate the information ratio for Sooner Stock Fund.

A) 1.53
B) 1.30
C) 8.67
D) 31.43
E) 37.14

F) A) and D)
G) A) and C)

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Question 2

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Discuss the M² measure of performance by answering the following questions.Why is M² better than the Sharpe measure What measure of risk does M² use How do you construct a managed portfolio, P, to use in computing the M² measure What is the formula for M² Draw a graph that shows how M² would be measured.Be sure to label the axes and all relevant points.

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The Sharpe measure indicates whether a portfolio underperformed the market index, but the difference between the market's Sharpe measure and the portfolio's Sharpe measure is difficult to interpret.M² uses the same measure of risk as the Sharpe measure-variation in total return, calculated as the standard deviation.For managed portfolio P an adjusted portfolio P* is formed by combining P with borrowing or lending at the risk-free rate to the point where P* has the same volatility as a market index (M).Then since M and P have the same standard deviation they can be directly compared using the M² measure.M² = r_P* - r_M.If P* outperforms M the measure will be positive, which means the CAL on which P* lies will have a steeper slope than the CML on which M lies.M² is the distance between the CAL and the CML. The graph should look like the one in Figure 24.2. Feedback: This question tests whether the student understands the characteristics and the construction of the M² measure.

Question 3

Multiple Choice

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Most professionally managed equity funds generally

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

Suppose you purchase one share of the stock of Cereal Correlation Company at the beginning of year 1 for $50.At the end of year 1, you receive a $1 dividend and buy one more share for $72.At the end of year 2, you receive total dividends of $2 (i.e., $1 for each share) and sell the shares for $67.20 each.The dollar-weighted return on your investment is

Suppose you purchase one share of the stock of Volatile Engineering Corporation at the beginning of year 1 for $36.At the end of year 1, you receive a $2 dividend and buy one more share for $30.At the end of year 2, you receive total dividends of $4 (i.e., $2 for each share) and sell the shares for $36.45 each.The time-weighted return on your investment is

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

Suppose you own two stocks, A and B.In year 1, stock A earns a 2% return and stock B earns a 9% return.In year 2, stock A earns an 18% return and stock B earns an 11% return.__________ has the higher arithmetic average return.

The following data are available relating to the performance of Wildcat Fund and the market portfolio: The risk-free return during the sample period was 7%. Calculate Sharpe's measure of performance for Wildcat Fund.

In a particular year, Aggie Mutual Fund earned a return of 15% by making the following investments in the following asset classes: The return on a bogey portfolio was 10%, calculated as follows: The contribution of selection within markets to total excess return was

The following data are available relating to the performance of Seminole Fund and the market portfolio: The risk-free return during the sample period was 6%. Calculate the M² measure for the Seminole Fund.

What is the problem with using the Sharpe measure for evaluation of an active portfolio management strategy

Suppose a particular investment earns an arithmetic return of 10% in year 1, 20% in year 2 and 30% in year 3.The geometric average return for the year period will be

The following data are available relating to the performance of Long Horn Stock Fund and the market portfolio: The risk-free return during the sample period was 6%. Calculate the information ratio for Long Horn Stock Fund.

__________ did not develop a popular method for risk-adjusted performance evaluation of mutual funds.

A portfolio manager's ranking within a comparison universe may not provide a good measure of performance because

The Sharpe, Treynor, and Jensen portfolio performance measures are derived from the CAPM,

Suppose you purchase one share of the stock of Cereal Correlation Company at the beginning of year 1 for $50.At the end of year 1, you receive a $1 dividend and buy one more share for $72.At the end of year 2, you receive total dividends of $2 (i.e., $1 for each share) and sell the shares for $67.20 each.The time-weighted return on your investment is

You want to evaluate three mutual funds using the Sharpe measure for performance evaluation.The risk-free return during the sample period is 4%.The average returns, standard deviations, and betas for the three funds are given below, as are the data for the S&P 500 Index. The fund with the highest Sharpe measure is

The following data are available relating to the performance of Monarch Stock Fund and the market portfolio: The risk-free return during the sample period was 4%. What is the information ratio measure of performance evaluation for Monarch Stock Fund