Chapter 24 Portfolio Performance Evaluation Multiple Choice Questions1.Trading activity by mutual funds just prior to quarterly reporting dates is known as A)insider trading. B)program trading. C)passive security selection. D)window dressing. E)none of the above. Answer: D Difficulty: Moderate Rationale: Mutual funds must disclose portfolio composition quarterly, and trading activity that immediately precedes the reporting date is referred to as window dressing. The speculation is that window dressing involves changes in portfolio composition, which gives the appearance of successful stock selection.2.The comparison universe is _. A)a concept found only in astronomy B)the set of all mutual funds in the world C)the set of all mutual funds in the U. S. D)a set of mutual funds with similar risk characteristics to your mutual fund E)none of the above Answer: D Difficulty: Easy Rationale: A mutual fund manager is evaluated against the performance of managers of funds of similar risk characteristics.3._ did not develop a popular method for risk-adjusted performance evaluation of mutual funds. A)Eugene Fama B)Michael Jensen C)William Sharpe D)Jack Treynor E)A and B Answer: A Difficulty: Easy Rationale: Michael Jensen, William Sharpe, and Jack Treynor developed popular models for mutual fund performance evaluation.4.Henriksson (1984) found that, on average, betas of funds _ during market advances A)increased very significantly B)increased slightly C)decreased slightly D)decreased very significantly E)did not change Answer: C Difficulty: Moderate Rationale: Portfolio betas should have a large value if the market is expected to perform well and a small value if the market is not expected to perform well; thus, these results reflect the poor timing ability of mutual fund managers.5.Most professionally managed equity funds generally _. A)outperform the S&P 500 index on both raw and risk-adjusted return measures B)underperform the S&P 500 index on both raw and risk-adjusted return measures C)outperform the S&P 500 index on raw return measures and underperform the S&P 500 index on risk-adjusted return measures D)underperform the S&P 500 index on raw return measures and outperform the S&P 500 index on risk-adjusted return measures E)match the performance of the S&P 500 index on both raw and risk-adjusted return measures Answer: B Difficulty: Moderate Rationale: Most mutual funds do not consistently, over time, outperform the S&P 500 index on the basis of either raw or risk-adjusted return measures.6.Suppose two portfolios have the same average return, the same standard deviation of returns, but portfolio A has a higher beta than portfolio B. According to the Sharpe measure, the performance of portfolio A _. A)is better than the performance of portfolio B B)is the same as the performance of portfolio B C)is poorer than the performance of portfolio B D)cannot be measured as there is no data on the alpha of the portfolio E)none of the above is true. Answer: B Difficulty: Moderate Rationale: The Sharpe index is a measure of average portfolio returns (in excess of the risk free return) per unit of total risk (as measured by standard deviation).7.Consider the Sharpe and Treynor performance measures. When a pension fund is large and has many managers, the _ measure is better for evaluating individual managers while the _ measure is better for evaluating the manager of a small fund with only one manager responsible for all investments. A)Sharpe, Sharpe B)Sharpe, Treynor C)Treynor, Sharpe D)Treynor, Treynor E)Both measures are equally good in both cases. Answer: C Difficulty: Moderate Rationale: The Treynor measure is the superior measure if the portfolio is a small portion of many portfolios combined into a large investment fund. The Sharpe measure is superior if the portfolio represents the investors total risky investment position.8.Suppose you purchase 100 shares of GM stock at the beginning of year 1, and purchase another 100 shares at the end of year 1. You sell all 200 shares at the end of year 2. Assume that the price of GM stock is $50 at the beginning of year 1, $55 at the end of year 1, and $65 at the end of year 2. Assume no dividends were paid on GM stock. Your dollar-weighted return on the stock will be _; your time-weighted return on the stock. A)higher than B)the same as C)less than D)exactly proportional to E)more information is necessary to answer this question Answer: A Difficulty: Moderate Rationale: In the dollar-weighted return, the stocks performance in the second year, when 200 shares are held, has a greater influence o