Portfolio Performance Evaluation Practice Quiz
Which of the following provides the greatest reduction in total risk?
A) Diversification
B) Asset allocation
C) Security selection
D) Beta reduction
The fixed-weightings approach to asset allocation:
A) Is based on an allocation of an equal percentage of the portfolio to each separate asset category.
B) Requires periodic rebalancing of the portfolio to maintain the desired weights.
C) Is based on periodic adjustments to category weights in response to market changes.
D) Uses stock-index futures and bond futures in a market timing strategy.
Tactical asset allocation is most suitable for:
A) Young, single individuals with good incomes.
B) Retirees.
C) Large institutional investors.
D) Investors who have already accumulated a fair amount of wealth.
Fred and Martha are in their seventies and retired. Which one of the following sets of portfolio statistics might best suit their situation if their primary investment goal is current income with limited risk?
A) Beta of 0.83 and a dividend yield of 6.3%
B) Beta of 0.86, and a dividend yield of 4.6%
C) Beta of 1.6 and a dividend yield of 6.4%
D) Beta of 1.1 and a dividend yield of 5.4%
Which of the following is the more appropriate measure of portfolio performance if you have only one mutual fund in your investment portfolio?
A) Jensen measure
B) Sharpe measure
C) Treynor measure
D) Information ratio
A portfolio manager realized an average annual return of 15%. The beta of the portfolio is 1.2 and the standard deviation of returns is 25%. The average annual return for the market index was 11% and the standard deviation of the market returns is 20%. The risk-free rate is 4%. Calculate the Sharpe measure for the portfolio.
A) 0.16
B) 0.44
C) 0.55
D) 0.64
A portfolio manager realized an average annual return of 10%. The beta of the portfolio is 0.8 and the standard deviation of returns is 20%. The average annual return for the market index was 12% and the standard deviation of the market returns is 25%. The risk-free rate is 3%. Calculate the Treynor measure for the portfolio.
A) 7.00
B) 8.75
C) 11.25
D) 12.50
A portfolio manager realized an average annual return of 12%. The beta of the portfolio is 1.1 and the standard deviation of returns is 30%. The average annual return for the market index is 10% and the standard deviation of the market returns is 25%. The risk-free rate is 5%. Calculate Jensen’s alpha for the portfolio.
A) 0.5%
B) -0.5%
C) 1.5%
D) -1.5%
A portfolio manager realized an average annual return of 10%. The beta of the portfolio is 0.7 and the standard deviation of returns is 25%. The average annual return for the market index is 12% and the standard deviation of the market returns is 20%. The risk-free rate is 4%. Calculate the M2 measure for the portfolio.
A) 3.2%
B) -3.2%
C) 1.2%
D) -1.2%
When short sales are ___________ and a portfolio alpha is ______, you can sell it short and turn the alpha to __________.
A) Allowed; negative; positive
B) Not allowed; negative; positive
C) Allowed; positive; positive
D) Not allowed; negative; negative
The two attributes of a benchmark against which a portfolio manager’s performance is assessed are ____________.
A) A 50% allocation to a stock index and a 50% allocation to a bond index
B) A neutral allocation across asset sectors and an index within each sector
C) A neutral allocation across asset sectors and a standard for risk measurement
D) A neutral allocation to a stock index and bond index
A typical performance attribution system decomposes performance into ____________.
A) Broad asset allocation, industry choice, and security choice
B) Broad asset allocation, index selection, and security choice
C) Index selection, industry choice, and security choice
D) Investment style, index selection, and industry choice
Style analysis has led to the conclusion that 90% or more of the variation in mutual fund returns can be explained by the mutual funds’ ____________.
A) Stock selection
B) Market timing
C) Risk management
D) Asset allocation
All of the following statements are correct with regard to perfect-timing ability, except:
A) Perfect-timing ability is equivalent to having a call option on the market portfolio.
B) The rate of return to a perfect market timer will be uncertain, but the risk cannot be measured by standard deviation.
C) The return premium on the perfect-timing strategy is also a risk premium.
D) Perfect timing dominates a passive strategy, providing only “good” surprises.
Sarah flips a fair coin to predict the changes in the market. Where one-half of all bull markets and one-half of all bear markets will be preceded by a correct forecast. What is the market timing score?
A) 1
B) 0
C) -1
D) 2
Which of the following is a measure of risk-adjusted return that considers both systematic and unsystematic risk?
A) Sharpe ratio
B) Treynor ratio
C) Jensen’s alpha
D) Information ratio
The Treynor ratio is best used when:
A) Evaluating a portfolio to be mixed with a position in the passive benchmark portfolio.
B) Choosing among portfolios competing as the optimal risky position.
C) Comparing with the desired performance based on a benchmark portfolio with actual performance.
D) Ranking many portfolios that will be mixed to form the optimal risky portfolio.
Which of the following is true regarding the expected return of a portfolio?
A) It is a weighted average only for stock portfolios.
B) It is a weighted average of the expected returns of the individual assets.
C) It is the sum of the expected returns of the individual assets.
D) It is the product of the expected returns of the individual assets.
Which of the following is a limitation of the Sharpe ratio?
A) It assumes all assets have a normal distribution of returns.
B) It uses only systematic risk in the calculation.
C) It does not consider the time horizon of the portfolio.
D) It does not adjust for risk-free rate returns.
A portfolio manager achieves a return of 18%, with a beta of 1.2. The market return is 10%, and the risk-free rate is 4%. Which of the following statements is true about this portfolio’s performance?
A) The portfolio outperformed the market.
B) The portfolio underperformed the market.
C) The portfolio’s performance cannot be determined.
D) The portfolio performed as expected.
What is the formula for calculating the Treynor ratio?
A) (Portfolio Return – Risk-Free Rate) / Portfolio Beta
B) (Portfolio Return – Risk-Free Rate) / Portfolio Standard Deviation
C) (Portfolio Return – Market Return) / Portfolio Beta
D) (Market Return – Risk-Free Rate) / Portfolio Beta
Which of the following is true about the Information ratio?
A) It compares portfolio returns to the risk-free rate.
B) It is used to assess a manager’s ability to generate returns in excess of a benchmark.
C) It focuses primarily on the portfolio’s total risk.
D) It is not affected by deviations from the market return.
A portfolio has a return of 15%, with a standard deviation of 20%. The risk-free rate is 5%. What is the portfolio’s Sharpe ratio?
A) 0.5
B) 0.75
C) 0.9
D) 1.0
Answer: 0.5
What is the main difference between the Sharpe ratio and the Treynor ratio?
A) The Sharpe ratio considers only unsystematic risk, while the Treynor ratio considers total risk.
B) The Sharpe ratio is used for well-diversified portfolios, while the Treynor ratio is used for individual assets.
C) The Treynor ratio considers the portfolio’s beta, while the Sharpe ratio uses total risk.
D) The Sharpe ratio is applicable to long-term investments, while the Treynor ratio is for short-term investments.
Which of the following metrics is best for assessing portfolio performance when comparing with a risk-free asset?
A) Sharpe ratio
B) Information ratio
C) Treynor ratio
D) Jensen’s alpha
If a portfolio has a return of 10%, a beta of 1.3, and the risk-free rate is 5%, the portfolio’s excess return over the risk-free rate is:
A) 4%
B) 5%
C) 6.5%
D) 8.5%
Which of the following represents the primary risk considered in the Treynor ratio?
A) Unsystematic risk
B) Systematic risk
C) Total risk
D) Idiosyncratic risk
What is the purpose of the M2 measure in portfolio evaluation?
A) To calculate the total risk of a portfolio
B) To compare risk-adjusted returns to the market portfolio
C) To assess the effectiveness of asset allocation
D) To measure how well a manager has outperformed a benchmark, adjusting for volatility
A portfolio manager uses a benchmark composed of 70% stocks and 30% bonds. If the portfolio return is 12%, and the benchmark return is 10%, the portfolio’s excess return is:
A) 1%
B) 2%
C) 12%
D) 10%
Which of the following measures the ability of a portfolio manager to generate excess returns relative to a benchmark?
A) Sharpe ratio
B) Treynor ratio
C) Alpha
D) Standard deviation
A portfolio has a return of 10% and a beta of 0.9. The risk-free rate is 4% and the market return is 8%. What is the portfolio’s Jensen’s alpha?
A) 0.4%
B) 0.8%
C) 1.2%
D) 2.0%
What is the purpose of the attribution analysis in portfolio management?
A) To calculate the portfolio’s return
B) To assess the portfolio’s risk
C) To determine the causes of performance differences relative to a benchmark
D) To determine the optimal asset allocation for the portfolio
If a portfolio manager’s excess return is 3% and the benchmark return is 2%, what is the portfolio’s relative performance?
A) 1%
B) 2%
C) 3%
D) 5%
Which of the following portfolio performance measures would be most appropriate to assess the risk-adjusted performance of a portfolio with no risk-free asset?
A) Sharpe ratio
B) Jensen’s alpha
C) Treynor ratio
D) Information ratio
A portfolio manager’s strategy of adjusting the portfolio’s weights in response to changing market conditions is known as:
A) Strategic asset allocation
B) Tactical asset allocation
C) Risk parity
D) Dynamic asset allocation
Which of the following best describes the Sharpe ratio?
A) It measures the portfolio’s return relative to the risk-free rate per unit of total risk.
B) It measures the portfolio’s return relative to the risk-free rate per unit of systematic risk.
C) It measures the portfolio’s total risk-adjusted return relative to its benchmark.
D) It measures the portfolio’s ability to generate excess returns compared to the market index.
Which of the following statements best describes a portfolio’s alpha?
A) It measures the expected return of the portfolio based on its beta and the market return.
B) It represents the portfolio’s performance relative to a risk-free asset.
C) It measures the excess return earned by a portfolio relative to its expected return based on its beta.
D) It quantifies the volatility of the portfolio’s returns.
What is the most likely consequence of a portfolio manager who engages in excessive risk-taking?
A) An increase in the Treynor ratio
B) An increase in the portfolio’s beta
C) A decrease in the Sharpe ratio
D) An increase in the portfolio’s alpha
Which of the following is the primary goal of portfolio performance evaluation?
A) To identify the optimal asset allocation for the portfolio
B) To measure the portfolio manager’s effectiveness in generating risk-adjusted returns
C) To calculate the expected return of the portfolio
D) To determine the portfolio’s market exposure
The Treynor ratio is most useful when comparing portfolios with:
A) Different levels of systematic risk
B) Similar levels of unsystematic risk
C) Different total risks
D) Different levels of diversification
The Information ratio measures the:
A) Risk-adjusted return of a portfolio relative to its benchmark.
B) Excess return of a portfolio relative to a risk-free asset.
C) Total risk of a portfolio.
D) Portfolio’s volatility compared to the market.
A portfolio has a return of 9%, the benchmark return is 7%, and the risk-free rate is 3%. If the portfolio’s beta is 1.2, what is the portfolio’s Treynor ratio?
A) 1.67
B) 1.0
C) 2.0
D) 0.33
Which of the following would be the best strategy for minimizing portfolio risk when the correlation between assets is negative?
A) Diversify the portfolio heavily in one asset class.
B) Invest in assets with low beta.
C) Invest in assets that have negative correlation with each other.
D) Use market timing to adjust the portfolio.
Which of the following is the primary difference between the Sharpe ratio and the Treynor ratio?
A) The Sharpe ratio uses total risk, while the Treynor ratio uses only systematic risk.
B) The Treynor ratio uses total risk, while the Sharpe ratio uses only systematic risk.
C) The Sharpe ratio measures performance relative to a benchmark, while the Treynor ratio does not.
D) The Treynor ratio is used for stock portfolios, while the Sharpe ratio is used for bond portfolios.
What is the primary function of performance attribution analysis?
A) To calculate the portfolio’s total risk-adjusted return
B) To assess how a portfolio’s return compares with the market return
C) To identify the sources of a portfolio’s return relative to its benchmark
D) To measure the portfolio’s beta and alpha
Which of the following strategies is best suited for a portfolio that is expected to be held for a short time horizon?
A) Active management focused on high beta stocks
B) Passive management with a diversified portfolio of bonds
C) Active management with market timing and tactical asset allocation
D) Risk-free investing in treasury bonds
If a portfolio’s return exceeds the return predicted by its beta, the portfolio has:
A) Positive Jensen’s alpha
B) Negative Jensen’s alpha
C) Zero Jensen’s alpha
D) Positive Sharpe ratio
A portfolio has an average return of 14%, a risk-free rate of 5%, and a standard deviation of 12%. What is the Sharpe ratio for the portfolio?
A) 0.75
B) 0.83
C) 0.92
D) 1.0
Which of the following performance measures adjusts a portfolio’s return by the level of risk taken relative to a benchmark?
A) Treynor ratio
B) Jensen’s alpha
C) Information ratio
D) Sharpe ratio
If a portfolio’s excess return is greater than its benchmark, it means that:
A) The portfolio manager is underperforming the market.
B) The portfolio has a high standard deviation.
C) The portfolio is outperforming the benchmark.
D) The portfolio is less risky than the benchmark.
Which of the following is true about the concept of “alpha” in portfolio performance evaluation?
A) Alpha represents the risk-adjusted return of the portfolio.
B) Alpha measures the portfolio’s overall risk.
C) Alpha indicates the difference between the expected return based on the CAPM and the actual return.
D) Alpha measures the correlation between the portfolio’s return and the benchmark.
If a portfolio has a higher Sharpe ratio than its benchmark, what does it indicate?
A) The portfolio is more volatile than the benchmark.
B) The portfolio is providing a higher return for the same level of risk compared to the benchmark.
C) The portfolio is less risky than the benchmark.
D) The portfolio is underperforming the benchmark.
The Treynor ratio is most appropriate when evaluating a portfolio that:
A) Is highly diversified.
B) Has no risk-free asset.
C) Has high unsystematic risk.
D) Has only systematic risk.
Which of the following statements is true about a portfolio with a low information ratio?
A) The portfolio manager is generating large excess returns relative to the benchmark.
B) The portfolio manager is taking on excessive risk.
C) The portfolio manager is not generating significant alpha relative to the benchmark.
D) The portfolio manager is outperforming the market.
What is the main purpose of the performance evaluation measure known as the “Jensen’s alpha”?
A) To assess the volatility of the portfolio.
B) To measure the portfolio’s return relative to a risk-free asset.
C) To calculate the excess return of the portfolio based on its beta.
D) To determine how much risk a portfolio is taking compared to its benchmark.
A portfolio has a beta of 1.5, the market return is 10%, and the risk-free rate is 3%. What is the expected return of the portfolio according to the Capital Asset Pricing Model (CAPM)?
A) 7.5%
B) 10.5%
C) 12.5%
D) 13.5%
If a portfolio manager has generated a return of 6% with a Sharpe ratio of 0.4, and the risk-free rate is 3%, what is the portfolio’s standard deviation?
A) 3%
B) 5%
C) 7.5%
D) 8%
Which of the following is an example of a performance measure that accounts for a portfolio’s risk relative to a benchmark?
A) Sharpe ratio
B) Information ratio
C) Treynor ratio
D) Alpha
A portfolio manager is assessing the performance of a portfolio with an annual return of 8%, a beta of 1.2, and a market return of 7%. The risk-free rate is 2%. What is the portfolio’s alpha?
A) 0.6%
B) 1.2%
C) 2.4%
D) 3%
If the correlation between two assets in a portfolio is -1, the portfolio will have:
A) A higher level of risk.
B) No diversification benefit.
C) Perfect negative correlation and can achieve zero risk.
D) A moderate risk level.
Which of the following performance measures takes into account the risk-free rate in the calculation?
A) Sharpe ratio
B) Treynor ratio
C) Jensen’s alpha
D) Information ratio
A portfolio manager is using the M2 measure to compare their portfolio’s risk-adjusted return to a market index. The M2 measure:
A) Is an alternative to the Sharpe ratio that accounts for differences in risk.
B) Measures the portfolio’s return without considering its risk.
C) Is the same as Jensen’s alpha.
D) Provides a measure of systematic risk.
Which of the following is a common use of the Information ratio in portfolio management?
A) To determine the market risk of a portfolio.
B) To assess a portfolio’s total return relative to a benchmark.
C) To evaluate the consistency of a portfolio manager’s performance relative to a benchmark.
D) To compare portfolio returns to a risk-free asset.
What is the most appropriate portfolio performance measure to assess the risk-adjusted returns of a portfolio relative to the market return?
A) Sharpe ratio
B) Treynor ratio
C) Alpha
D) Information ratio
A portfolio has an alpha of 2%. This means:
A) The portfolio outperformed the market by 2% after adjusting for its risk.
B) The portfolio underperformed the market by 2%.
C) The portfolio’s return was 2% higher than the risk-free rate.
D) The portfolio’s return exceeded the benchmark by 2%.
What does a positive Jensen’s alpha indicate?
A) The portfolio’s return is lower than expected given its risk level.
B) The portfolio is earning returns in excess of what would be predicted by its beta.
C) The portfolio has a higher level of volatility than its benchmark.
D) The portfolio’s return equals the market return.
Which of the following is true about the Treynor ratio?
A) It measures the portfolio’s return relative to its unsystematic risk.
B) It calculates the risk-adjusted return based on systematic risk.
C) It is most useful for portfolios with high levels of total risk.
D) It does not require a benchmark.
If the beta of a portfolio is 0.8 and the market return is 10%, what would the portfolio’s expected return be, assuming a risk-free rate of 4%?
A) 6.8%
B) 8.4%
C) 10%
D) 12.4%
A portfolio has a return of 14%, with a standard deviation of 20%, and a Sharpe ratio of 0.5. If the risk-free rate is 4%, what is the portfolio’s excess return?
A) 2%
B) 4%
C) 5%
D) 10%
Which of the following performance measures is best used when evaluating the performance of a portfolio with a large degree of unsystematic risk?
A) Sharpe ratio
B) Treynor ratio
C) Information ratio
D) Jensen’s alpha
The risk-free rate for a portfolio is 3%, and the portfolio’s return is 12%. The portfolio’s beta is 1.3. What is the portfolio’s expected return according to the Capital Asset Pricing Model (CAPM)?
A) 10%
B) 12%
C) 13.9%
D) 15%
The portfolio’s information ratio is calculated as the ratio of:
A) The portfolio’s alpha to the portfolio’s total risk.
B) The portfolio’s excess return to the tracking error.
C) The portfolio’s return to the benchmark’s return.
D) The portfolio’s total return to its systematic risk.
If the tracking error of a portfolio is very high, it suggests that:
A) The portfolio’s returns are highly correlated with the benchmark.
B) The portfolio’s returns are not consistent with the benchmark’s returns.
C) The portfolio is highly diversified.
D) The portfolio has minimal systematic risk.
A portfolio manager aims to beat a benchmark index. If the portfolio has a positive alpha, it means that:
A) The portfolio has underperformed the benchmark after adjusting for its risk.
B) The portfolio has outperformed the benchmark after adjusting for its risk.
C) The portfolio has performed at par with the benchmark.
D) The portfolio’s risk level is higher than the benchmark.
The Sharpe ratio measures:
A) The portfolio’s excess return relative to its systematic risk.
B) The portfolio’s return relative to the risk-free rate.
C) The portfolio’s excess return relative to its total risk.
D) The portfolio’s return relative to its benchmark.
What is the purpose of calculating Jensen’s alpha in portfolio management?
A) To determine the portfolio’s overall return.
B) To measure the portfolio’s systematic risk.
C) To assess the portfolio’s return relative to its risk-adjusted return.
D) To calculate the portfolio’s total risk.
If a portfolio has a beta of 1.2, what does it imply about the portfolio?
A) The portfolio is less volatile than the market.
B) The portfolio’s risk is equal to that of the market.
C) The portfolio is more volatile than the market.
D) The portfolio has no systematic risk.
The M2 measure compares a portfolio’s risk-adjusted performance to:
A) The risk-free rate.
B) The benchmark’s risk-adjusted performance.
C) The portfolio’s risk level.
D) The portfolio’s total return.
A portfolio manager uses the Treynor ratio to evaluate performance. The manager is particularly interested in:
A) Total portfolio risk.
B) The return earned above the risk-free rate.
C) Excess returns relative to systematic risk.
D) Excess returns relative to total risk.
Which of the following is true regarding the relationship between the information ratio and the portfolio’s performance?
A) A higher information ratio indicates better performance relative to a benchmark.
B) A lower information ratio indicates better performance relative to a benchmark.
C) The information ratio only accounts for a portfolio’s total return.
D) The information ratio measures the portfolio’s risk-adjusted return relative to the market.
If a portfolio’s Sharpe ratio is greater than its benchmark, this suggests that:
A) The portfolio is underperforming the market.
B) The portfolio is providing better returns per unit of risk compared to the benchmark.
C) The portfolio has higher volatility than the benchmark.
D) The portfolio is less diversified than the benchmark.
What does a positive information ratio indicate about the portfolio manager’s performance?
A) The manager has underperformed the benchmark.
B) The manager has generated returns in excess of the benchmark, relative to the portfolio’s risk.
C) The manager’s performance is consistent with the benchmark.
D) The manager has no systematic risk exposure.
What is the significance of the Treynor ratio for a portfolio with high unsystematic risk?
A) The Treynor ratio is irrelevant in such cases.
B) It helps assess the portfolio’s performance relative to both unsystematic and systematic risks.
C) It measures the return per unit of unsystematic risk.
D) It is most useful for portfolios where only systematic risk matters.
A portfolio has a return of 10%, with a risk-free rate of 4%, and a standard deviation of 8%. What is the portfolio’s Sharpe ratio?
A) 0.75
B) 1.00
C) 1.50
D) 0.80
A portfolio manager uses a benchmark that consists of 60% equities and 40% bonds. The portfolio returns 9%, while the benchmark returns 8%. What is the portfolio’s alpha?
A) 1%
B) 0.5%
C) 0.2%
D) 2%
Which of the following performance measures is adjusted for both the portfolio’s total risk and its systematic risk?
A) Jensen’s alpha
B) Treynor ratio
C) Sharpe ratio
D) M2 measure
Which of the following is an appropriate measure for evaluating portfolio performance when considering both risk and return?
A) Beta
B) Standard deviation
C) Sharpe ratio
D) Tracking error
If a portfolio manager’s alpha is negative, it suggests that:
A) The portfolio has underperformed its benchmark after adjusting for risk.
B) The portfolio has outperformed its benchmark after adjusting for risk.
C) The portfolio’s returns are not correlated with the benchmark.
D) The portfolio is generating excess returns.
A portfolio with an information ratio of 0.5 would be considered:
A) To have high risk-adjusted returns compared to the benchmark.
B) To have an average performance relative to the benchmark.
C) To have low risk-adjusted returns compared to the benchmark.
D) To have no performance advantage over the benchmark.
Which of the following is true regarding the use of the Treynor ratio to assess portfolio performance?
A) The Treynor ratio is used to evaluate risk-adjusted performance based on total risk.
B) The Treynor ratio only considers the unsystematic risk of a portfolio.
C) The Treynor ratio evaluates performance based on systematic risk only.
D) The Treynor ratio evaluates the correlation between a portfolio’s returns and market returns.
If a portfolio has an excess return of 6% and a beta of 1.5, what is the portfolio’s Treynor ratio?
A) 4%
B) 8%
C) 10%
D) 9%
What does the Sharpe ratio help determine when evaluating portfolio performance?
A) The return per unit of unsystematic risk.
B) The return per unit of systematic risk.
C) The return per unit of total risk.
D) The portfolio’s alpha compared to its beta.
What is the primary advantage of using Jensen’s alpha over other performance metrics?
A) It accounts for both systematic and unsystematic risk.
B) It helps measure performance relative to the risk-free rate.
C) It compares a portfolio’s return to the return predicted by the CAPM model.
D) It compares a portfolio’s return to its benchmark’s return.
If a portfolio’s tracking error is high, it typically means that:
A) The portfolio is closely following the performance of its benchmark.
B) The portfolio’s returns are inconsistent with the benchmark.
C) The portfolio has no systematic risk exposure.
D) The portfolio is highly diversified with low risk.
What is the purpose of calculating the M2 measure in portfolio performance evaluation?
A) To compare the risk-adjusted returns of two portfolios.
B) To assess a portfolio’s alpha relative to the market.
C) To measure the portfolio’s return relative to its total risk.
D) To compare the risk-adjusted performance of a portfolio with its benchmark.
In the context of portfolio performance evaluation, what does a tracking error of 0.6% suggest about the portfolio?
A) The portfolio has closely mirrored the benchmark’s performance.
B) The portfolio’s returns are highly variable compared to the benchmark.
C) The portfolio is highly diversified with minimal risk.
D) The portfolio is poorly correlated with the benchmark’s returns.
Which of the following is true about a portfolio with a high information ratio?
A) The portfolio has a low tracking error.
B) The portfolio has a return that is significantly below the benchmark.
C) The portfolio’s returns are highly correlated with its benchmark’s returns.
D) The portfolio is generating excess return relative to its risk.
When evaluating portfolio performance, the measure that adjusts returns for the level of risk in relation to the portfolio’s beta is:
A) Sharpe ratio
B) Treynor ratio
C) Jensen’s alpha
D) Information ratio
A portfolio manager is evaluating performance with the CAPM model. If the actual return is higher than the expected return based on the market’s beta, this indicates:
A) A negative Jensen’s alpha.
B) A positive Jensen’s alpha.
C) That the portfolio is underperforming the market.
D) That the portfolio’s total risk is too high.
Which of the following performance measures accounts for a portfolio’s systematic risk in its calculation?
A) Information ratio
B) Sharpe ratio
C) Treynor ratio
D) Alpha
If the M2 measure is higher than that of a benchmark, it suggests that:
A) The portfolio has underperformed its benchmark.
B) The portfolio has achieved better risk-adjusted returns than the benchmark.
C) The portfolio’s total risk is higher than the benchmark.
D) The portfolio’s risk is lower than the benchmark.
A portfolio manager is analyzing the alpha of a portfolio. If the alpha is negative, what should the manager infer?
A) The portfolio has outperformed its benchmark.
B) The portfolio has underperformed its benchmark.
C) The portfolio has generated excess returns after adjusting for risk.
D) The portfolio has no correlation with the market.
A portfolio has a return of 10%, with a risk-free rate of 2% and a standard deviation of 5%. What is the Sharpe ratio for the portfolio?
A) 1.60
B) 1.80
C) 2.00
D) 1.20
If a portfolio’s Treynor ratio is higher than the benchmark, it suggests that:
A) The portfolio has underperformed the benchmark after adjusting for risk.
B) The portfolio has outperformed the benchmark relative to its systematic risk.
C) The portfolio’s total risk is higher than the benchmark’s.
D) The portfolio’s return is less volatile than the benchmark.
The information ratio is used to measure:
A) The portfolio’s performance relative to the risk-free rate.
B) The portfolio’s risk-adjusted return relative to its benchmark.
C) The total return relative to the portfolio’s risk.
D) The alpha of the portfolio in comparison to its systematic risk.
Which of the following statements is true about portfolios with higher tracking errors?
A) They have higher correlation with their benchmark.
B) They are more volatile relative to their benchmark.
C) They exhibit lower risk-adjusted returns than their benchmark.
D) They have lower alpha than their benchmark.
A portfolio has an alpha of 2%, and the benchmark return is 8%. The portfolio’s return is 10%. What does the 2% alpha indicate?
A) The portfolio has underperformed the benchmark.
B) The portfolio has outperformed the benchmark by 2%.
C) The portfolio’s return is equal to the benchmark.
D) The portfolio has achieved an excess return of 10%.
The key difference between the Sharpe ratio and the Treynor ratio is that the Sharpe ratio uses:
A) Total risk while the Treynor ratio uses only systematic risk.
B) Systematic risk while the Treynor ratio uses total risk.
C) Alpha while the Treynor ratio uses excess returns.
D) The risk-free rate while the Treynor ratio uses market returns.
The M2 measure is equivalent to:
A) A variation of the Treynor ratio that adjusts for total risk.
B) A version of the Sharpe ratio that compares portfolio performance to a benchmark.
C) A performance measure that adjusts the portfolio’s return relative to the market.
D) A measure of systematic risk in portfolio performance.
Which of the following statements about the Treynor ratio is true?
A) The Treynor ratio uses total risk to evaluate portfolio performance.
B) The Treynor ratio is only applicable to portfolios with beta greater than 1.
C) The Treynor ratio measures the portfolio’s return relative to systematic risk.
D) The Treynor ratio is based on the average return of the portfolio.
Which of the following is a limitation of the Sharpe ratio when evaluating portfolio performance?
A) It ignores unsystematic risk.
B) It assumes that returns follow a normal distribution.
C) It only compares portfolio returns with a benchmark.
D) It fails to account for the risk-free rate of return.
What does a positive Jensen’s alpha indicate?
A) The portfolio has performed better than expected based on its risk.
B) The portfolio has underperformed its benchmark.
C) The portfolio has achieved returns equal to its benchmark.
D) The portfolio has higher systematic risk than its benchmark.
A portfolio’s tracking error measures:
A) The total risk of the portfolio.
B) The difference in return between the portfolio and its benchmark.
C) The portfolio’s ability to outperform its benchmark.
D) The portfolio’s alpha relative to the market.
The information ratio is calculated by dividing the portfolio’s alpha by:
A) The portfolio’s beta.
B) The tracking error.
C) The total risk of the portfolio.
D) The portfolio’s market risk.
If a portfolio has a low Sharpe ratio, what does this suggest?
A) The portfolio is generating a high return relative to its risk.
B) The portfolio is taking on a significant amount of risk without adequate return.
C) The portfolio is highly diversified with minimal risk.
D) The portfolio is more volatile than the market.
If a portfolio has a Jensen’s alpha of 1.5%, this suggests that:
A) The portfolio has underperformed the market by 1.5%.
B) The portfolio has generated a return 1.5% higher than what is predicted by the CAPM model.
C) The portfolio’s return is equal to the market’s return.
D) The portfolio has a beta of 1.5.
A portfolio with an information ratio of 0.75 indicates that:
A) The portfolio is outperforming its benchmark by a significant margin.
B) The portfolio’s risk-adjusted returns are relatively low compared to the benchmark.
C) The portfolio has a high tracking error compared to the benchmark.
D) The portfolio’s excess return per unit of risk is high.
What does the Sharpe ratio tell us about portfolio performance?
A) The portfolio’s return relative to its systematic risk.
B) The portfolio’s excess return relative to its total risk.
C) The portfolio’s return compared to the return of its benchmark.
D) The portfolio’s ability to hedge against market fluctuations.
If a portfolio’s beta is greater than 1, it indicates that:
A) The portfolio is less volatile than the market.
B) The portfolio is more volatile than the market.
C) The portfolio’s return is independent of market fluctuations.
D) The portfolio has low unsystematic risk.
Which of the following statements is true regarding the relationship between a portfolio’s alpha and beta?
A) A portfolio’s alpha can be negative if it underperforms relative to its beta.
B) A portfolio with a higher beta always has a higher alpha.
C) Alpha measures a portfolio’s total risk, while beta measures only systematic risk.
D) A portfolio with a positive alpha is less risky than one with a negative alpha.
What is the primary objective when using the Treynor ratio in portfolio evaluation?
A) To determine the portfolio’s return in excess of the risk-free rate.
B) To compare the portfolio’s return to the total market’s return.
C) To assess the risk-adjusted performance based on systematic risk.
D) To identify the portfolio’s unsystematic risk.
What is the key difference between the Sharpe ratio and the Treynor ratio?
A) The Sharpe ratio measures performance based on total risk, while the Treynor ratio focuses on systematic risk.
B) The Sharpe ratio adjusts for unsystematic risk, while the Treynor ratio adjusts for systematic risk.
C) The Sharpe ratio measures alpha, while the Treynor ratio measures beta.
D) The Sharpe ratio focuses on market risk, while the Treynor ratio focuses on total risk.
A portfolio’s total risk includes:
A) Systematic risk only.
B) Unsystematic risk only.
C) Both systematic and unsystematic risks.
D) Only the risk associated with the market.
In the context of portfolio performance evaluation, what does the M2 measure adjust for?
A) The portfolio’s risk relative to the risk-free rate.
B) The portfolio’s return relative to the market’s risk.
C) The portfolio’s total risk relative to its benchmark.
D) The portfolio’s return relative to the amount of risk taken.
A portfolio has an information ratio of 1.2, and the tracking error is 5%. What is the portfolio’s alpha?
A) 6%
B) 5.4%
C) 6.2%
D) 0.6%
Which of the following is true if a portfolio has a high alpha?
A) The portfolio has outperformed the market relative to its risk.
B) The portfolio has underperformed the market relative to its risk.
C) The portfolio has a higher beta than the market.
D) The portfolio has no unsystematic risk.
The main purpose of the Treynor ratio is to:
A) Measure portfolio performance in relation to market risk.
B) Compare portfolio performance to the risk-free rate.
C) Evaluate the correlation between the portfolio’s returns and market returns.
D) Assess the total risk of the portfolio.
The Sharpe ratio can be used to compare portfolios with:
A) The same amount of unsystematic risk.
B) Different amounts of total risk.
C) Identical returns but different betas.
D) The same beta but different returns.
Which performance measure adjusts for a portfolio’s total risk?
A) Treynor ratio
B) Sharpe ratio
C) Information ratio
D) Jensen’s alpha
If a portfolio has a Jensen’s alpha of zero, what does this indicate?
A) The portfolio has outperformed its expected return based on its beta.
B) The portfolio has underperformed its expected return based on its beta.
C) The portfolio’s return is exactly as expected given its systematic risk.
D) The portfolio’s risk is higher than expected based on its return.
Which of the following is considered a key advantage of using the Treynor ratio over the Sharpe ratio?
A) It considers only unsystematic risk.
B) It adjusts for the total risk of a portfolio.
C) It uses the portfolio’s systematic risk (beta) rather than total risk.
D) It focuses on market returns rather than excess returns.
Which of the following statements about the Sharpe ratio is true?
A) A higher Sharpe ratio indicates better risk-adjusted performance.
B) A lower Sharpe ratio always indicates that the portfolio is performing poorly.
C) The Sharpe ratio accounts only for unsystematic risk.
D) The Sharpe ratio ignores the risk-free rate.
Which of the following metrics is used to evaluate the risk-adjusted return relative to a portfolio’s benchmark?
A) Sharpe ratio
B) Tracking error
C) Information ratio
D) Treynor ratio
In portfolio performance evaluation, the term “tracking error” refers to:
A) The difference in returns between the portfolio and its benchmark.
B) The risk-free rate of return minus the portfolio’s return.
C) The portfolio’s volatility compared to the market’s volatility.
D) The risk associated with the portfolio’s unsystematic risk.
The Information ratio is generally more useful when:
A) Comparing portfolios with different beta values.
B) Evaluating the risk-free rate against market returns.
C) Analyzing the difference between the portfolio’s return and its benchmark return.
D) Assessing systematic and unsystematic risks together.
If a portfolio has a negative Jensen’s alpha, what does it suggest?
A) The portfolio is outperforming the market based on its beta.
B) The portfolio has generated lower returns than expected based on its risk.
C) The portfolio has no unsystematic risk.
D) The portfolio is taking on too much systematic risk.
The Sharpe ratio is best used to:
A) Compare the portfolio’s performance to a risk-free asset.
B) Evaluate the return per unit of unsystematic risk.
C) Assess the portfolio’s performance based on its beta.
D) Determine the amount of alpha generated by the portfolio.
A portfolio with a high tracking error indicates that:
A) The portfolio closely tracks its benchmark.
B) The portfolio has large deviations in return from its benchmark.
C) The portfolio is highly diversified.
D) The portfolio’s return is consistently higher than the benchmark.
In performance evaluation, the term “active return” refers to:
A) The return of the portfolio relative to a risk-free asset.
B) The return of the portfolio relative to its benchmark.
C) The return of the portfolio after adjusting for total risk.
D) The portfolio’s return adjusted for systematic risk.
What does a negative Treynor ratio indicate about a portfolio?
A) The portfolio is underperforming relative to its systematic risk.
B) The portfolio is performing better than expected based on its beta.
C) The portfolio’s unsystematic risk is higher than its systematic risk.
D) The portfolio is overly diversified.
The Sharpe ratio is commonly used to:
A) Compare portfolios with different levels of systematic risk.
B) Measure the return of a portfolio per unit of total risk.
C) Evaluate portfolios against their benchmark only.
D) Assess a portfolio’s market performance in isolation.
The Treynor ratio differs from the Sharpe ratio in that it only accounts for:
A) Total risk
B) Systematic risk
C) Unsystematic risk
D) Excess returns
The higher the Treynor ratio, the better the portfolio has performed:
A) Relative to the total risk taken.
B) In comparison to the market index.
C) Based on the risk-free rate.
D) Relative to the market’s systematic risk.
In portfolio evaluation, the alpha of a portfolio is calculated as:
A) The return above the risk-free rate adjusted for total risk.
B) The return of the portfolio minus the return of the benchmark, adjusted for risk.
C) The difference between the portfolio’s return and the market’s return.
D) The return above the expected return based on the CAPM model.
A portfolio with a positive alpha has:
A) Outperformed the market relative to its risk.
B) Performed worse than the market relative to its risk.
C) A beta greater than 1.
D) Generated the same return as its benchmark.
A portfolio’s tracking error can be reduced by:
A) Increasing the portfolio’s risk-free asset allocation.
B) Lowering the portfolio’s volatility.
C) Reducing the active management in the portfolio.
D) Increasing the correlation between the portfolio and its benchmark.
The information ratio can be useful in determining:
A) A portfolio’s market risk compared to a benchmark.
B) A portfolio’s return relative to a risk-free asset.
C) A portfolio’s performance relative to its benchmark after adjusting for risk.
D) A portfolio’s alpha with respect to systematic risk.
Which of the following statements is true about the relationship between tracking error and information ratio?
A) A lower tracking error leads to a higher information ratio.
B) A higher tracking error leads to a higher information ratio.
C) Tracking error and information ratio are not related.
D) Tracking error is inversely related to alpha.
The Treynor ratio is typically used for evaluating:
A) Portfolios with a well-diversified set of assets.
B) Portfolios with a significant amount of unsystematic risk.
C) The risk-free rate of return against the market.
D) The excess returns relative to the market risk.
Which of the following is true about the Sharpe ratio?
A) It evaluates the portfolio’s risk based only on its systematic risk.
B) A higher Sharpe ratio indicates better risk-adjusted returns.
C) It does not consider the risk-free rate of return.
D) It is used to calculate the portfolio’s alpha.
A positive Jensen’s alpha indicates that:
A) The portfolio is underperforming relative to its expected return based on its beta.
B) The portfolio is outperforming relative to its expected return based on its beta.
C) The portfolio has an equal return to its benchmark.
D) The portfolio’s total risk is higher than its benchmark.
The Treynor ratio is often preferred over the Sharpe ratio for portfolios that are:
A) Highly diversified with minimal unsystematic risk.
B) Exposed to low levels of systematic risk.
C) Focused primarily on unsystematic risk.
D) Dependent on short-term market movements.
The information ratio measures:
A) A portfolio’s excess return per unit of total risk.
B) A portfolio’s performance relative to its benchmark after adjusting for tracking error.
C) The degree of correlation between the portfolio and the market index.
D) A portfolio’s ability to outperform a risk-free asset.
Which of the following is an implication of a portfolio having a high tracking error?
A) The portfolio’s performance is closely aligned with its benchmark.
B) The portfolio’s return is significantly different from the benchmark.
C) The portfolio has a high degree of diversification.
D) The portfolio’s risk-adjusted return is higher than its benchmark.
The Sharpe ratio is calculated by dividing the portfolio’s excess return by:
A) The portfolio’s standard deviation.
B) The portfolio’s systematic risk.
C) The portfolio’s total risk.
D) The portfolio’s beta.
A portfolio’s alpha is positive when:
A) The portfolio’s return is equal to the expected return based on its beta.
B) The portfolio’s return is higher than expected based on its beta.
C) The portfolio’s beta is negative.
D) The portfolio’s risk is lower than expected based on its return.
A portfolio manager can reduce the tracking error by:
A) Increasing the portfolio’s diversification.
B) Investing in only high-risk assets.
C) Actively managing the portfolio to deviate from the benchmark.
D) Investing solely in government bonds.
Which ratio would an investor use to assess the performance of a portfolio relative to its benchmark while accounting for risk?
A) Sharpe ratio
B) Treynor ratio
C) Information ratio
D) Alpha
A higher information ratio suggests that:
A) The portfolio has outperformed the risk-free asset.
B) The portfolio has achieved high returns relative to its benchmark’s risk.
C) The portfolio has higher systematic risk than its benchmark.
D) The portfolio’s return is lower than its benchmark.
What is the main difference between the Treynor ratio and the Sharpe ratio?
A) The Treynor ratio uses total risk while the Sharpe ratio uses systematic risk.
B) The Treynor ratio uses systematic risk while the Sharpe ratio uses total risk.
C) The Treynor ratio includes tracking error, whereas the Sharpe ratio does not.
D) The Treynor ratio is only applicable for comparing international portfolios.
A portfolio with a tracking error of zero indicates:
A) The portfolio’s returns exactly match its benchmark returns.
B) The portfolio’s risk is entirely unsystematic.
C) The portfolio has no correlation with the benchmark.
D) The portfolio is risk-free.
Which of the following is considered an advantage of the Sharpe ratio over other performance metrics?
A) It adjusts for the portfolio’s systematic risk.
B) It compares returns relative to a benchmark index.
C) It accounts for both total risk and return.
D) It focuses solely on returns, ignoring risk.
A portfolio’s alpha is calculated as:
A) The difference between the portfolio’s actual return and the expected return based on the Capital Asset Pricing Model (CAPM).
B) The total risk of the portfolio divided by its beta.
C) The risk-free rate minus the portfolio’s return.
D) The return on the portfolio minus the return of the benchmark.
The Sharpe ratio is a good measure of performance when the goal is to:
A) Minimize systematic risk.
B) Compare the portfolio’s return to a risk-free asset’s return.
C) Measure return relative to market risk.
D) Evaluate the portfolio’s risk-adjusted return.
A portfolio with a high Treynor ratio indicates that:
A) The portfolio has low total risk relative to its return.
B) The portfolio has low unsystematic risk relative to its return.
C) The portfolio has earned a high return per unit of market risk.
D) The portfolio’s beta is close to zero.
If a portfolio manager aims to generate positive alpha, they are aiming to:
A) Match the benchmark return based on the portfolio’s beta.
B) Achieve returns higher than expected based on systematic risk.
C) Minimize the portfolio’s risk relative to its benchmark.
D) Match the risk-free rate of return.
A portfolio’s information ratio is calculated as:
A) Excess return divided by total risk.
B) Excess return divided by tracking error.
C) Portfolio return minus the benchmark return.
D) Alpha divided by systematic risk.
In portfolio performance evaluation, what does a negative information ratio indicate?
A) The portfolio has underperformed relative to its benchmark.
B) The portfolio’s returns are perfectly correlated with its benchmark.
C) The portfolio is taking on too little risk compared to its benchmark.
D) The portfolio has generated higher returns than the benchmark.
Which performance metric is best used when assessing a portfolio that is highly diversified?
A) Treynor ratio
B) Sharpe ratio
C) Jensen’s alpha
D) Information ratio
Which of the following best describes a portfolio with a negative Jensen’s alpha?
A) The portfolio is outperforming its expected return based on its systematic risk.
B) The portfolio is underperforming relative to its expected return based on its beta.
C) The portfolio’s performance is in line with the benchmark.
D) The portfolio is taking more risk than the benchmark.
Which of the following is a limitation of the Sharpe ratio?
A) It does not account for the portfolio’s total risk.
B) It is based on the portfolio’s expected return.
C) It assumes returns are normally distributed.
D) It can only be used for stock portfolios.
A portfolio’s tracking error is a measure of:
A) The volatility of the portfolio’s returns relative to its benchmark.
B) The portfolio’s alpha relative to its benchmark.
C) The portfolio’s unsystematic risk.
D) The total risk of the portfolio.
If the information ratio of a portfolio is negative, it indicates that:
A) The portfolio has earned positive excess returns compared to its benchmark.
B) The portfolio is underperforming relative to its benchmark after adjusting for tracking error.
C) The portfolio has outperformed its benchmark on a risk-adjusted basis.
D) The portfolio’s total return is lower than its expected return.
Which performance evaluation metric is most appropriate for evaluating the return of a portfolio relative to the market risk?
A) Treynor ratio
B) Sharpe ratio
C) Information ratio
D) Jensen’s alpha
In portfolio performance evaluation, what does a high Sharpe ratio indicate?
A) The portfolio is taking excessive risks compared to its returns.
B) The portfolio has a good return relative to its total risk.
C) The portfolio has low unsystematic risk.
D) The portfolio has a high degree of market risk.
A portfolio manager who actively manages a portfolio to produce positive Jensen’s alpha is trying to:
A) Achieve a return equal to the risk-free rate.
B) Outperform the benchmark by generating excess return after adjusting for risk.
C) Match the return of the benchmark.
D) Minimize the portfolio’s risk.
The Treynor ratio is most useful for:
A) Evaluating portfolios with low levels of diversification.
B) Assessing the total risk of a portfolio.
C) Analyzing portfolios that are well-diversified.
D) Determining the appropriate level of risk-free assets.
What does a portfolio’s positive alpha indicate in performance evaluation?
A) The portfolio is taking more risk than the benchmark.
B) The portfolio is outperforming its expected return based on its risk level.
C) The portfolio’s returns are equal to the benchmark’s return.
D) The portfolio is highly correlated with the benchmark’s return.
Which of the following is true about the Sharpe ratio and the Treynor ratio?
A) The Sharpe ratio is used to evaluate the portfolio’s performance relative to systematic risk, while the Treynor ratio evaluates total risk.
B) The Sharpe ratio and Treynor ratio both account for total risk.
C) The Treynor ratio is preferred for diversified portfolios, while the Sharpe ratio is better for individual assets.
D) The Sharpe ratio is used when the portfolio’s total risk is the focus, while the Treynor ratio is used when systematic risk is the focus.
The use of a benchmark in performance evaluation helps investors to:
A) Measure the relative risk of the portfolio.
B) Compare the portfolio’s performance to a relevant standard or index.
C) Adjust for the portfolio’s tracking error.
D) Adjust for the portfolio’s total risk.
Which of the following is a disadvantage of the Sharpe ratio?
A) It does not account for systematic risk.
B) It requires a benchmark for comparison.
C) It assumes a normal distribution of returns.
D) It does not consider the risk-free rate.
The information ratio is defined as the portfolio’s:
A) Excess return divided by the portfolio’s tracking error.
B) Return relative to the risk-free asset.
C) Alpha divided by total risk.
D) Total risk divided by beta.
In performance evaluation, which metric would be most useful for assessing how well a portfolio compensates investors for taking on systematic risk?
A) Sharpe ratio
B) Treynor ratio
C) Information ratio
D) Jensen’s alpha
A high tracking error indicates that:
A) The portfolio is closely following its benchmark.
B) The portfolio’s returns are highly correlated with its benchmark.
C) The portfolio’s returns are significantly different from the benchmark.
D) The portfolio has low total risk.
In the context of portfolio performance evaluation, the term “active return” refers to:
A) The portfolio’s return above the risk-free rate.
B) The portfolio’s return minus the benchmark’s return.
C) The return earned by an actively managed portfolio.
D) The return relative to market risk.
When a portfolio manager aims to increase the Sharpe ratio, they are attempting to:
A) Increase the portfolio’s returns without increasing its risk.
B) Maximize the portfolio’s returns at the cost of greater risk.
C) Minimize the portfolio’s unsystematic risk.
D) Increase the portfolio’s total risk.
A portfolio with a high information ratio indicates that:
A) The portfolio has underperformed relative to its benchmark.
B) The portfolio has a low tracking error and is outperforming its benchmark on a risk-adjusted basis.
C) The portfolio has very low returns.
D) The portfolio has significant exposure to systematic risk.
If a portfolio’s Sharpe ratio is lower than the benchmark’s Sharpe ratio, it suggests that:
A) The portfolio has a higher return than the benchmark.
B) The portfolio is taking on more risk relative to its return than the benchmark.
C) The portfolio’s total risk is the same as the benchmark’s risk.
D) The portfolio has a lower beta than the benchmark.
If an investor’s primary concern is minimizing risk relative to return, which performance metric would be most useful?
A) Sharpe ratio
B) Jensen’s alpha
C) Treynor ratio
D) Information ratio
A portfolio’s Treynor ratio is calculated as:
A) Portfolio’s excess return divided by its total risk.
B) Portfolio’s excess return divided by its systematic risk (beta).
C) Portfolio’s total return divided by its total risk.
D) Portfolio’s alpha divided by its systematic risk.
What does a portfolio’s information ratio measure?
A) The portfolio’s total risk relative to its benchmark.
B) The portfolio’s alpha relative to its benchmark.
C) The portfolio’s excess return relative to its total risk.
D) The portfolio’s risk-adjusted return relative to its tracking error.
If a portfolio manager’s objective is to achieve positive alpha, this means the manager is attempting to:
A) Match the benchmark return.
B) Outperform the benchmark after adjusting for the portfolio’s risk.
C) Minimize the portfolio’s unsystematic risk.
D) Achieve a return that exceeds the risk-free rate.
A portfolio has a Sharpe ratio of 1.5. What does this indicate?
A) The portfolio is earning 1.5 times the risk-free rate.
B) The portfolio’s returns are 1.5 times the risk-adjusted return.
C) The portfolio’s return exceeds the risk-free rate by 1.5 times per unit of risk.
D) The portfolio is taking on less risk than the market.
A portfolio’s performance evaluation involves comparing its returns to a relevant benchmark. Which of the following is an example of such a benchmark?
A) The risk-free rate.
B) A peer group of similar funds.
C) The portfolio’s beta.
D) The Treynor ratio of the portfolio.
Which performance metric helps to evaluate how much excess return a portfolio generates per unit of total risk?
A) Sharpe ratio
B) Treynor ratio
C) Information ratio
D) Jensen’s alpha
If a portfolio has a tracking error of 5% and the excess return relative to its benchmark is 4%, what is the portfolio’s information ratio?
A) 0.80
B) 0.50
C) 1.20
D) 1.00
What is the primary advantage of using Jensen’s alpha for portfolio performance evaluation?
A) It adjusts returns for both systematic and unsystematic risk.
B) It accounts for the total risk of a portfolio.
C) It reflects the portfolio’s return in excess of the expected return based on beta.
D) It directly compares the portfolio’s risk to its benchmark.
What does a positive information ratio indicate?
A) The portfolio is taking on excessive risk relative to its returns.
B) The portfolio is underperforming the benchmark.
C) The portfolio is generating a positive excess return relative to its tracking error.
D) The portfolio has an alpha that is above the risk-free rate.
The Treynor ratio is most useful for evaluating:
A) Highly diversified portfolios.
B) Portfolios with high unsystematic risk.
C) Individual stocks.
D) The performance of portfolios with high levels of systematic risk.
Which of the following would result in an increase in a portfolio’s Sharpe ratio?
A) An increase in portfolio risk without a change in return.
B) A decrease in portfolio risk with no change in return.
C) A decrease in the risk-free rate.
D) A decrease in the portfolio’s return.
The primary difference between the Sharpe ratio and the Treynor ratio is that the Sharpe ratio uses:
A) Total risk (standard deviation) as the denominator, while the Treynor ratio uses systematic risk (beta).
B) Only systematic risk as the denominator, while the Treynor ratio uses total risk.
C) Jensen’s alpha as the numerator, while the Treynor ratio uses excess return.
D) Tracking error in its calculation, while the Treynor ratio does not.
In portfolio performance evaluation, a high tracking error typically suggests that:
A) The portfolio’s returns are highly correlated with the benchmark’s returns.
B) The portfolio is closely aligned with the benchmark’s performance.
C) The portfolio is deviating significantly from the benchmark’s returns.
D) The portfolio is not being actively managed.
A portfolio manager’s goal in active management is to achieve:
A) A return equal to the benchmark’s return.
B) A return that exceeds the benchmark’s return after adjusting for risk.
C) A return that matches the risk-free rate.
D) A return that does not exceed the benchmark’s return.
If a portfolio has a negative Treynor ratio, it suggests that:
A) The portfolio is underperforming relative to its systematic risk.
B) The portfolio is outperforming the market after adjusting for risk.
C) The portfolio’s risk is much lower than the market’s.
D) The portfolio is taking on excessive risk.
Which of the following is the most suitable performance metric when comparing two portfolios with similar levels of diversification but different betas?
A) Sharpe ratio
B) Jensen’s alpha
C) Treynor ratio
D) Information ratio
If a portfolio has a higher Sharpe ratio than its benchmark, it means:
A) The portfolio has outperformed the benchmark on a risk-adjusted basis.
B) The portfolio has taken on more risk than the benchmark.
C) The portfolio has a higher total return than the benchmark.
D) The portfolio has a lower alpha than the benchmark.
A portfolio manager aims to maximize the alpha. Which of the following actions is most likely to achieve this?
A) Increasing the portfolio’s beta to increase exposure to market risk.
B) Taking on more unsystematic risk.
C) Selecting securities that outperform the market after adjusting for their risk.
D) Reducing the tracking error of the portfolio.
If a portfolio has an information ratio of 2.5, it means that:
A) The portfolio has earned 2.5 times the benchmark’s return.
B) The portfolio has outperformed its benchmark by 2.5 times per unit of tracking error.
C) The portfolio is taking 2.5 times more risk than the benchmark.
D) The portfolio’s alpha is 2.5 times higher than its benchmark.
The Sharpe ratio assumes that:
A) The portfolio’s returns are normally distributed.
B) The portfolio’s returns are skewed to the right.
C) The portfolio’s returns are unpredictable.
D) The portfolio’s returns are consistent over time.
Which of the following statements is true regarding the Treynor ratio?
A) The Treynor ratio measures excess return per unit of total risk.
B) The Treynor ratio is most suitable for evaluating portfolios with a significant amount of unsystematic risk.
C) The Treynor ratio measures excess return per unit of systematic risk (beta).
D) The Treynor ratio adjusts for both systematic and unsystematic risk.
A portfolio manager’s objective in terms of Jensen’s alpha is to:
A) Achieve the highest possible Sharpe ratio.
B) Maximize the portfolio’s risk-adjusted return relative to its benchmark.
C) Achieve a positive alpha, indicating outperformance of the market after adjusting for risk.
D) Minimize tracking error relative to the benchmark.
If a portfolio’s return is above the market’s return but with the same beta, this means that:
A) The portfolio has earned a higher alpha.
B) The portfolio is underperforming relative to its risk.
C) The portfolio has lower systematic risk than the market.
D) The portfolio has a higher tracking error than the benchmark.
In portfolio performance evaluation, a benchmark is useful for:
A) Identifying the optimal level of diversification.
B) Providing a risk-free comparison for portfolio returns.
C) Assessing the performance of a portfolio relative to its market or peer group.
D) Calculating the portfolio’s alpha.
The information ratio is most closely associated with:
A) The performance of the portfolio relative to the market.
B) The portfolio’s ability to track the benchmark’s performance.
C) The portfolio’s alpha adjusted for its tracking error.
D) The portfolio’s excess return adjusted for its beta.
Which of the following describes the main limitation of using the Sharpe ratio in portfolio evaluation?
A) It does not adjust for the portfolio’s beta.
B) It ignores systematic risk and focuses only on total risk.
C) It may be misleading if the portfolio returns are not normally distributed.
D) It requires a higher risk-free rate to be effective.
The Treynor ratio is more appropriate for evaluating:
A) Portfolios with low beta.
B) Highly diversified portfolios where unsystematic risk is minimal.
C) Portfolios with significant unsystematic risk.
D) Portfolios with no correlation to the market.
In portfolio performance evaluation, if a portfolio’s Sharpe ratio is greater than its benchmark’s, this suggests:
A) The portfolio has a higher total return than its benchmark.
B) The portfolio has outperformed the benchmark on a risk-adjusted basis.
C) The portfolio has a higher risk level than the benchmark.
D) The portfolio’s returns are skewed more positively than the benchmark.
The concept of “active risk” in portfolio performance evaluation refers to:
A) The risk associated with market fluctuations.
B) The volatility of returns relative to the risk-free rate.
C) The risk generated by the portfolio’s deviations from the benchmark.
D) The systematic risk of the portfolio.
Which of the following statements best describes a portfolio with a negative Jensen’s alpha?
A) The portfolio is outperforming the market after adjusting for risk.
B) The portfolio is underperforming the market after adjusting for risk.
C) The portfolio has no systematic risk.
D) The portfolio has higher returns than the benchmark with lower risk.
A portfolio with a higher alpha compared to its benchmark is indicative of:
A) Higher total risk.
B) Stronger market correlation.
C) Superior risk-adjusted performance.
D) Lower tracking error.
When evaluating a portfolio’s performance, the use of tracking error helps to assess:
A) The portfolio’s overall risk relative to the market.
B) The extent to which the portfolio deviates from its benchmark.
C) The portfolio’s returns relative to the risk-free rate.
D) The performance of the portfolio’s individual securities.
The Sharpe ratio is best used for evaluating portfolios:
A) That have high correlation with a benchmark.
B) With significant exposure to systematic risk.
C) With low diversification and significant unsystematic risk.
D) That include both systematic and unsystematic risk.
Which of the following performance metrics focuses on evaluating the performance of a portfolio relative to its systematic risk (beta)?
A) Information ratio
B) Treynor ratio
C) Sharpe ratio
D) Jensen’s alpha
If a portfolio’s return exceeds its expected return based on its level of systematic risk (beta), the portfolio’s Jensen’s alpha is:
A) Positive.
B) Negative.
C) Zero.
D) Uncertain, as alpha depends on the Sharpe ratio.
The information ratio is calculated as the portfolio’s excess return divided by its:
A) Beta.
B) Tracking error.
C) Total risk.
D) Risk-free rate.
The primary goal of using the Treynor ratio in portfolio evaluation is to:
A) Evaluate the portfolio’s performance with respect to both systematic and unsystematic risk.
B) Evaluate the portfolio’s performance relative to its beta or market risk.
C) Evaluate the portfolio’s performance relative to its total risk.
D) Evaluate the portfolio’s risk-adjusted performance without considering the risk-free rate.
A portfolio with a high information ratio is likely to:
A) Have a high tracking error.
B) Perform similarly to its benchmark.
C) Deliver excess returns relative to its benchmark for each unit of tracking error.
D) Have a lower alpha than its benchmark.
A positive Treynor ratio implies:
A) The portfolio is taking on less systematic risk than the market.
B) The portfolio is outperforming the market after adjusting for systematic risk.
C) The portfolio has a higher tracking error than its benchmark.
D) The portfolio is underperforming the market after adjusting for risk.
In performance evaluation, the excess return of a portfolio is calculated as:
A) The portfolio’s return minus the risk-free rate.
B) The portfolio’s return minus the benchmark return.
C) The portfolio’s return minus its beta.
D) The portfolio’s total risk minus its unsystematic risk.