Fin 320 week 9 quiz – strayer

FIN 320 Week 9 Quiz – Strayer
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Quiz 7 Chapter 17 and 18
Chapter 17: ___________________________________________________________________________
1. Today's futures markets are dominated by trading in _______ contracts.
A. metals
B. agriculture
C. financial
D. commodity
2. A person with a long position in a commodity futures contract wants the price of the commodity to
______.
A. decrease substantially
B. increase substantially
C. remain unchanged
D. increase or decrease substantially
3. If an asset price declines, the investor with a _______ is exposed to the largest potential loss.
A. long call option
B. long put option
C. long futures contract
D. short futures contract

4. The clearing corporation has a net position equal to ______.
A. the open interest
B. the open interest times 2
C. the open interest divided by 2
D. zero
5. The S&P 500 Index futures contract is an example of a(n) ______ delivery contract. The pork bellies
contract is an example of a(n) ______ delivery contract.
A. cash; cash
B. cash; actual
C. actual; cash
D. actual; actual
6. Which one of the following contracts requires no cash to change hands when initiated?
A. Listed put option
B. Short futures contract
C. Forward contract
D. Listed call option
7. Synthetic stock positions are commonly used by ______ because of their ______.
A. market timers; lower transaction cost
B. banks; lower risk
C. wealthy investors; tax treatment
D. money market funds; limited exposure

8. _____________ are likely to close their positions before the expiration date, while ____________ are
likely to make or take delivery.
A. Investors; regulators
B. Hedgers; speculators
C. Speculators; hedgers
D. Regulators; investors
9. Futures contracts have many advantages over forward contracts except that _________.
A. futures positions are easier to trade
B. futures contracts are tailored to the specific needs of the investor
C. futures trading preserves the anonymity of the participants
D. counterparty credit risk is not a concern on futures
10. An investor who is hedging a corporate bond portfolio using a T-bond futures contract is said to have
_______.
A. an arbitrage
B. a cross-hedge
C. an over hedge
D. a spread hedge
11. The open interest on silver futures at a particular time is the number of __________.
A. all outstanding silver futures contracts
B. long and short silver futures positions counted separately on a particular trading day
C. silver futures contracts traded during the day
D. silver futures contracts traded the previous day

12. An investor who goes short in a futures contract will _____ any increase in value of the underlying asset
and will _____ any decrease in value in the underlying asset.
A. pay; pay
B. pay; receive
C. receive; pay
D. receive; receive
13. An investor who goes long in a futures contract will _____ any increase in value of the underlying asset
and will _____ any decrease in value in the underlying asset.
A. pay; pay
B. pay; receive
C. receive; pay
D. receive; receive
14. The advantage that standardization of futures contracts brings is that _____ is improved because
____________________.
A. liquidity; all traders must trade a small set of identical contracts
B. credit risk; all traders understand the risk of the contracts
C. pricing; convergence is more likely to take place with fewer contracts
D. trading cost; trading volume is reduced
15. The fact that the exchange is the counterparty to every futures contract issued is important because it
eliminates _________ risk.
A. market
B. credit
C. interest rate
D. basis

16. In the futures market the short position's loss is ___________ the long position's gain.
A. greater than
B. less than
C. equal to
D. sometimes less than and sometimes greater than
17. A wheat farmer should __________ in order to reduce his exposure to risk associated with fluctuations in
wheat prices.
A. sell wheat futures
B. buy wheat futures
C. buy a contract for delivery of wheat now and sell a contract for delivery of wheat at harvest time
D. sell wheat futures if the basis is currently positive and buy wheat futures if the basis is currently negative
18. Which of the following provides the profit to a long position at contract maturity?
A. Original futures price - Spot price at maturity
B. Spot price at maturity - Original futures price
C. Zero
D. Basis
19. You take a long position in a futures contract of one maturity and a short position in a contract of a
different maturity, both on the same commodity. This is called a __________.
A. cross-hedge
B. reversing trade
C. spread position
D. straddle

20. Interest rate futures contracts exist for all of the following except __________.
A. federal funds
B. Eurodollars
C. banker's acceptances
D. repurchase agreements
21. Initial margin is usually set in the region of ________ of the total value of a futures contract.
A. 5%-15%
B. 10%-20%
C. 15%-25%
D. 20%-30%
22. Margin must be posted by ________.
A. buyers of futures contracts only
B. sellers of futures contracts only
C. both buyers and sellers of futures contracts
D. speculators only
23. The daily settlement of obligations on futures positions is called _____________.
A. a margin call
B. marking to market
C. a variation margin check
D. the initial margin requirement

24. Which of the following provides the profit to a short position at contract maturity?
A. Original futures price - Spot price at maturity
B. Spot price at maturity - Original futures price
C. Zero
D. Basis
25. Margin requirements for futures contracts can be met by ______________.
A. cash only
B. cash or highly marketable securities such as Treasury bills
C. cash or any marketable securities
D. cash or warehouse receipts for an equivalent quantity of the underlying commodity
26. An established value below which a trader's margin may not fall is called the ________.
A. daily limit
B. daily margin
C. maintenance margin
D. convergence limit
27. Which one of the following is a true statement?
A. A margin deposit can be met only by cash.
B. All futures contracts require the same margin deposit.
C. The maintenance margin is the amount of money you post with your broker when you buy or sell a
futures contract.
D. The maintenance margin is the value of the margin account below which the holder of a futures contract
receives a margin call.

28. At maturity of a futures contract, the spot price and futures price must be approximately the same because
of __________.
A. marking to market
B. the convergence property
C. the open interest
D. the triple witching hour
29. A futures contract __________.
A. is a contract to be signed in the future by the buyer and the seller of a commodity
B. is an agreement to buy or sell a specified amount of an asset at a predetermined price on the expiration
date of the contract
C. is an agreement to buy or sell a specified amount of an asset at whatever the spot price happens to be on
the expiration date of the contract
D. gives the buyer the right, but not the obligation, to buy an asset some time in the future
30. Which one of the following exploits differences between actual future prices and their theoretically correct
parity values?
A. Index arbitrage
B. Marking to market
C. Reversing trades
D. Settlement transactions
31. Which one of the following refers to the daily settlement of obligations on future positions?
A. Marking to market
B. The convergence property
C. The open interest
D. The triple witching hour

32. The most actively traded interest rate futures contract is for ___________.
A. LIBOR
B. Treasury bills
C. Eurodollars
D. Treasury bonds
33. The CME weather futures contract is an example of ______________.
A. a cash-settled contract
B. an agricultural contract
C. a financial future
D. a commodity future
34. Single stock futures, as opposed to stock index futures, are _______________.
A. not yet being offered by any exchanges
B. offered overseas but not in the United States
C. currently trading on One Chicago, a joint venture of several exchanges
D. scheduled to begin trading in 2015 on several exchanges
35. You are currently long in a futures contract. You instruct a broker to enter the short side of a futures
contract to close your position. This is called __________.
A. a cross-hedge
B. a reversing trade
C. a speculation
D. marking to market

36. A company that mines bauxite, an aluminum ore, decides to short aluminum futures. This is an example of
__________ to limit its risk.
A. cross-hedging
B. long hedging
C. spreading
D. speculating
37. Futures markets are regulated by the __________.
A. CFA Institute
B. CFTC
C. CIA
D. SEC
38. A hog farmer decides to sell hog futures. This is an example of __________ to limit risk.
A. cross-hedging
B. short hedging
C. spreading
D. speculating
39. On May 21, 2012, you could have purchased a futures contract from Intrade for a price of $5.70 that would
pay you $10 if Barack Obama won the 2012 presidential election. This tells you _____.
A. that the market believed that Obama had a 57% chance of winning
B. that the market believed that Obama would not win the election
C. nothing about the market's belief concerning the odds of Obama winning
D. that the market believed Obama's chances of winning were about 43%

40. An investor would want to __________ to exploit an expected fall in interest rates.
A. sell S&P 500 Index futures
B. sell Treasury-bond futures
C. buy Treasury-bond futures
D. buy wheat futures
41. Forward contracts _________ traded on an organized exchange, and futures contracts __________ traded
on an organized exchange.
A. are; are
B. are; are not
C. are not; are
D. are not; are not
42. If the S&P 500 Index futures contract is overpriced relative to the spot S&P 500 Index, you should
__________.
A. buy all the stocks in the S&P 500 and write put options on the S&P 500 Index
B. sell all the stocks in the S&P 500 and buy call options on S&P 500 Index
C. sell S&P 500 Index futures and buy all the stocks in the S&P 500
D. sell short all the stocks in the S&P 500 and buy S&P 500 Index futures
43. A long hedge is a simultaneous __________ position in the spot market and a __________ position in the
futures market.
A. long; long
B. long; short
C. short; long
D. short; short

44. Investors who take short positions in futures contract agree to ___________ delivery of the commodity on
the delivery date, and those who take long positions agree to __________ delivery of the commodity.
A. make; make
B. make; take
C. take; make
D. take; take
45. An investor would want to __________ to hedge a long position in Treasury bonds.
A. buy interest rate futures
B. buy Treasury bonds in the spot market
C. sell interest rate futures
D. sell S&P 500 futures
46. Futures contracts are said to exhibit the property of convergence because _______________.
A. the profits from long positions and short positions must ultimately be equal
B. the profits from long positions and short positions must ultimately net to zero
C. price discrepancies would open arbitrage opportunities for investors who spot them
D. the futures price and spot price of any asset must ultimately net to zero
47. In the context of a futures contract, the basis is defined as ______________.
A. the futures price minus the spot price
B. the spot price minus the futures price
C. the futures price minus the initial margin
D. the profit on the futures contract

48. The __________ is among the world's largest derivatives exchanges and operates a fully electronic trading
and clearing platform.
A. CBOE
B. CBOT
C. CME
D. Eurex
49. Violation of the spot-futures parity relationship results in _______________.
A. fines and other penalties imposed by the SEC
B. arbitrage opportunities for investors who spot them
C. suspension of delivery privileges
D. suspension of trading
50. When dividend-paying assets are involved, the spot-futures parity relationship can be stated as
_________________.
A. F1 = S0(1 + rf)
B. F0 = S0(1 + rf - d)T
C. F0 = S0(1 + rf + d)T
D. F0 = S0(1 + rf)T
51. An investor establishes a long position in a futures contract now (time 0) and holds the position until
maturity (time T). The sum of all daily settlements will be __________.
A. F0 - FT
B. F0 - S0
C. FT - F0
D. FT - S0

52. A short hedge is a simultaneous __________ position in the spot market and a __________ position in the
futures market.
A. long; long
B. long; short
C. short; long
D. short; short
53. Approximately __________ of futures contracts result in actual delivery.
A. 0%
B. less than 1% to 3%
C. less than 5% to 15%
D. less than 60% to 80%
54. A long hedger will __________ from an increase in the basis; a short hedger will __________.
A. be hurt; be hurt
B. be hurt; profit
C. profit; be hurt
D. profit; profit
55. At year-end, taxes on a futures position _______________.
A. must be paid if the position has been closed out
B. must be paid if the position has not been closed out
C. must be paid regardless of whether the position has been closed out or not
D. need not be paid if the position supports a hedge

56. A speculator will often prefer to buy a futures contract rather than the underlying asset because:
I. Gains in futures contracts can be larger due to leverage.
II. Transaction costs in futures are typically lower than those in spot markets.
III. Futures markets are often more liquid than the markets of the underlying commodities.
A. I and II only
B. II and III only
C. I and III only
D. I, II, and III
57. On January 1, you sold one April S&P 500 Index futures contract at a futures price of 1,300. If the April
futures price is 1,250 on February 1, your profit would be __________ if you close your position. (The
contract multiplier is 250.)
A. -$12,500
B. -$15,000
C. $15,000
D. $12,500
58. The current level of the S&P 500 is 1,250. The dividend yield on the S&P 500 is 3%. The risk-free interest
rate is 6%. The futures price quote for a contract on the S&P 500 due to expire 6 months from now should
be __________.
A. 1,274.33
B. 1,286.95
C. 1,268.61
D. 1,291.29

59. The spot price for gold is $1,550 per ounce. The dividend yield on the S&P 500 is 2.5%. The risk-free
interest rate is 3.5%. The futures price for gold for a 6-month contract on gold should be __________.
A. $1,504.99
B. $1,569.08
C. $1,554.04
D. $1,557.73
60. If you expect a stock market downturn, one potential defensive strategy would be to __________.
A. buy stock-index futures
B. sell stock-index futures
C. buy stock-index options
D. sell foreign exchange futures
61. At contract maturity the basis should equal ___________.
A. 1
B. 0
C. the risk-free interest rate
D. -1
62. You believe that the spread between the September T-bond contract and the June T-bond futures contract is
too large and will soon correct. This market exhibits positive cost of carry for all contracts. To take
advantage of this, you should ______________.
A. buy the September contract and sell the June contract
B. sell the September contract and buy the June contract
C. sell the September contract and sell the June contract
D. buy the September contract and buy the June contract

63. A 1-year gold futures contract is selling for $1,645. Spot gold prices are $1,592 and the 1-year risk-free rate
is 3%.
The arbitrage profit implied by these prices is _____________.
A. $3.27
B. $4.39
C. $5.24
D. $6.72
64. A 1-year gold futures contract is selling for $1,645. Spot gold prices are $1,592 and the 1-year risk-free rate
is 3%.
Based on the above data, which of the following set of transactions will yield positive riskless arbitrage
profits?
A. Buy gold in the spot with borrowed money, and sell the futures contract.
B. Buy the futures contract, and sell the gold spot and invest the money earned.
C. Buy gold spot with borrowed money, and buy the futures contract.
D. Buy the futures contract, and buy the gold spot using borrowed money.
65. A hypothetical futures contract on a nondividend-paying stock with a current spot price of $100 has a
maturity of 1 year. If the T-bill rate is 5%, what should the futures price be?
A. $95.24
B. $100
C. $105
D. $107

66. A hypothetical futures contract on a nondividend-paying stock with a current spot price of $100 has a
maturity of 4 years. If the T-bill rate is 7%, what should the futures price be?
A. $76.29
B. $93.46
C. $107
D. $131.08
67. On Monday morning you sell one June T-bond futures contract at 97:27, that is, for $97,843.75. The
contract's face value is $100,000. The initial margin requirement is $2,700, and the maintenance margin
requirement is $2,000 per contract. Use the following price data to answer the following questions.
After Monday's close the balance on your margin account will be ________.
A. $2,700
B. $2,000
C. $3,137.50
D. $2,262.50

At the close of day on Tuesday your cumulative rate of return on your investment is _____.
A. 16.2%
B. -5.8%
C. -.16%
D. -2.2%
On which of the given days do you get a margin call?
A. Monday
B. Tuesday
C. Wednesday
D. None of these options

The cumulative rate of return on your investment after Wednesday is a ____.
A. 79.9% loss
B. 2.6% loss
C. 33% gain
D. 53.9% loss
71. The volume of interest rate swaps increased from almost zero in 1980 to over __________ today.
A. $40 million
B. $400 million
C. $400 billion
D. $400 trillion
72. If the risk-free rate is greater than the dividend yield, then we know that _______________.
A. the futures price will be higher as contract maturity increases
B. F0 < S0
C. FT > ST
D. arbitrage profits are possible

73. Sahali Trading Company has issued $100 million worth of long-term bonds at a fixed rate of 9%. Sahali
Trading Company then enters into an interest rate swap where it will pay LIBOR and receive a fixed 8% on
a notional principal of $100 million. After all these transactions are considered, Sahali's cost of funds is
__________.
A. 17%
B. LIBOR
C. LIBOR + 1%
D. LIBOR - 1%
74. Interest rate swaps involve the exchange of ________________.
A. actual fixed-rate bonds for actual floating-rate bonds
B. actual floating-rate bonds for actual fixed-rate bonds
C. net interest payments and an actual principal swap
D. net interest payments based on notional principal, but no exchange of principal
75. From the perspective of determining profit and loss, the long futures position most closely resembles a
levered investment in a ____________.
A. long call
B. short call
C. short stock position
D. long stock position
76. The _________ contract dominates trading in stock-index futures.
A. S&P 500
B. DJIA
C. Nasdaq 100
D. Russell 2000

77. The ________ and the _______ have the lowest correlations with the large-cap indexes.
A. Nasdaq Composite; Russell 2000
B. NYSE; DJIA
C. S&P 500; DJIA
D. Russell 2000; S&P 500
78. The use of leverage is practiced in the futures markets due to the existence of _________.
A. banks
B. brokers
C. clearinghouses
D. margin
79. You purchase an interest rate futures contract that has an initial margin requirement of 15% and a futures
price of $115,098. The contract has a $100,000 underlying par value bond. If the futures price falls to
$108,000, you will experience a ______ loss on your money invested.
A. 31%
B. 41%
C. 52%
D. 64%
80. You own a $15 million bond portfolio with a modified duration of 11 years. Interest rates are expected to
increase by 5 basis points, or .05%. What is the price value of a basis point?
A. $10,400
B. $14,300
C. $16,500
D. $21,300

81. The price of a corn futures contract is $2.65 per bushel when the contract is issued, and the commodity spot
price is $2.55. When the contract expires, the two prices are identical. What principle is represented by this
price behavior?
A. Convergence
B. Margin
C. Basis
D. Volatility
82. A corporation will be issuing bonds in 6 months, and the treasurer is concerned about unfavorable interest
rate moves in the interim. The best way for her to hedge the risk is to _________________.
A. buy T-bond futures
B. sell T-bond futures
C. buy stock-index futures
D. sell stock-index futures
83. A farmer sells futures contracts at a price of $2.75 per bushel. The spot price of corn is $2.55 at contract
expiration. The farmer harvested 12,500 bushels of corn and sold futures contracts on 10,000 bushels of
corn.
What are the farmer's proceeds from the sale of corn?
A. $27,500
B. $31,875
C. $33,875
D. $35,950

84. A farmer sells futures contracts at a price of $2.75 per bushel. The spot price of corn is $2.55 at contract
expiration. The farmer harvested 12,500 bushels of corn and sold futures contracts on 10,000 bushels of
corn.
Ignoring the transaction costs, how much did the farmer improve his cash flow by hedging sales with the
futures contracts?
A. $0
B. $2,000
C. $31,875
D. $33,875
85. A bank has made long-term fixed-rate mortgages and has financed them with short-term deposits. To hedge
out its interest rate risk, the bank could ________.
A. sell T-bond futures
B. buy T-bond futures
C. buy stock-index futures
D. sell stock-index futures
86. A market timer now believes that the economy will soften over the rest of the year as the housing market
slump continues, and she also believes that foreign investors will stop buying U.S. fixed-income securities
in the large quantities that they have in the past. One way the timer could take advantage of this forecast is
to ________________.
A. buy T-bond futures and sell stock-index futures
B. sell T-bond futures and buy stock-index futures
C. buy stock-index futures and buy T-bond futures
D. sell stock-index futures and sell T-bond futures

87. The Student Loan Marketing Association (SLMA) has short-term student loans funded by long-term debt.
To hedge out this interest rate risk, SLMA could:
I. Engage in a swap to pay fixed and receive variable interest payments
II. Engage in a swap to pay variable and receive fixed interest payments
III. Buy T-bond futures
IV. Sell T-bond futures
A. I and II only
B. I and IV only
C. II and III only
D. II and IV only

Chapter 18:
_____________________________________________________________________
______
1. A mutual fund with a beta of 1.1 has outperformed the S&P 500 over the last 20
years. We know that this mutual fund manager _____.
A. must have had superior stock selection ability.
B. must have had superior asset allocation ability.
C. must have had superior timing ability.
D. may or may not have outperformed the S&P 500 on a risk-adjusted basis.
2. The comparison universe is __________.
A. the bogey portfolio
B. a set of mutual funds with similar risk characteristics to your mutual fund
C. the set of all mutual funds in the United States
D. the set of all mutual funds in the world
3. Which one of the following performance measures is the Sharpe ratio?
A. Average excess return to beta ratio
B. Average excess return to standard deviation ratio
C. Alpha to standard deviation of residuals ratio
D. Average return minus required return

4. The M2 measure is a variant of ________________.
A. the Sharpe measure
B. the Treynor measure
C. Jensen's alpha
D. the appraisal ratio
5. A managed portfolio has a standard deviation equal to 22% and a beta of .9 when
the market portfolio's standard deviation is 26%. The adjusted portfolio P* needed
to calculate the M2 measure will have ________ invested in the managed portfolio
and the rest in T-bills.
A. 84.6%
B. 118%
C. 18%
D. 15.4%
6. Your return will generally be higher using the __________ if you time your
transactions poorly, and your return will generally be higher using the
__________ if you time your transactions well.
A. dollar-weighted return method; dollar-weighted return method
B. dollar-weighted return method; time-weighted return method
C. time-weighted return method; dollar-weighted return method
D. time-weighted return method; time-weighted return method

7. Consider the Sharpe and Treynor performance measures. When a pension fund is
large and well diversified in total and it 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, which may not be fully diversified.
A. Sharpe; Sharpe
B. Sharpe; Treynor
C. Treynor; Sharpe
D. Treynor; Treynor
8. Consider the theory of active portfolio management. Stocks A and B have the
same beta and the same positive alpha. Stock A has higher nonsystematic risk than
stock B. You should want __________ in your active portfolio.
A. equal proportions of stocks A and B
B. more of stock A than stock B
C. more of stock B than stock A
D. The answer cannot be determined from the information given.
9. Suppose that over the same time period two portfolios have the same average
return and the same standard deviation of return, but portfolio A has a higher beta
than portfolio B. According to the Sharpe ratio, 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 since there is no data on the alpha of the portfolio

10.Which model is preferred by academics, and is gaining in popularity with
practitioners, when evaluating investment performance?
A. The Treynor-Black model
B. The single-index model
C. The Fama-French three-factor model
D. The Sharpe model
11.The risk-free rate, average returns, standard deviations, and betas for three funds
and the S&P 500 are given below.
What is the Treynor measure for portfolio A?
A. 12.38%
B. 2.38%
C. .91%
D. 3.64%

What is the M2 measure for portfolio B?
A. .43%
B. 1.25%
C. 1.77%
D. 1.43%
If these portfolios are subcomponents that make up part of a well-diversified
portfolio, then portfolio ______ is preferred.
A. A
B. B
C. C
D. S&P 500

Based on the M2 measure, portfolio C has a superior return of _____ as compared
to the S&P 500.
A. -1.33%
B. 1.43%
C. 2%
D. 0%
15.Which one of the following is largely based on forecasts of macroeconomic
factors?
A. Security selection
B. Passive investing
C. Market efficiency
D. Market timing
16.Based on the example used in the book, a perfect market timer would have made
_______ by 2008 on a $1 investment made in 1926.
A. $100
B. $1,626
C. $1.5 million
D. $36.7 billion

17.The average returns, standard deviations, and betas for three funds are given
below along with data for the S&P 500 Index. The risk-free return during the
sample period is 6%.
You want to evaluate the three mutual funds using the Sharpe ratio for
performance evaluation. The fund with the highest Sharpe ratio of performance is
__________.
A. fund A
B. fund B
C. fund C
You want to evaluate the three mutual funds using the Treynor measure for
performance evaluation. The fund with the highest Treynor measure of
performance is __________.
A. fund A
B. fund B
C. fund C

You want to evaluate the three mutual funds using the Jensen measure for
performance evaluation. The fund with the highest Jensen measure of performance
is __________.
A. fund A
B. fund B
C. fund C
D. S&P 500
20.In a particular year, Salmon Arm Mutual Fund earned a return of 16% by making
the following investments in asset classes:
The return on a bogey portfolio was 12%, based on the following:
The total excess return on the managed portfolio was __________.
A. 2%
B. 3%
C. 4%
D. 5%

The contribution of asset allocation across markets to the total excess return was
__________.
A. 1.5%
B. 2%
C. 2.5%
D. 3.5%

The contribution of security selection within asset classes to the total excess return
was __________.
A. 1.5%
B. 2%
C. 2.5%
D. 3.5%
23.In a particular year, Lost Hope Mutual Fund made the following investments in
asset classes:
The total extra return on the managed portfolio was __________.
A. 1%
B. 2%
C. 3%
D. 4%

asset classes:
The contribution of asset allocation across markets to the total extra return was
__________.
A. -1%
B. 0%
C. 1%
D. 2%

asset classes:
The contribution of security selection within asset classes to the total extra return
was __________.
A. -1%
B. 0%
C. 1%
D. 2%
26.Which one of the following averaging methods is the preferred method of
constructing returns series for use in evaluating portfolio performance?
A. Geometric average
B. Arithmetic average
C. Dollar weighted
D. Internal
27.The __________ calculates the reward to risk trade-off by dividing the average
portfolio excess return by the portfolio beta.
A. Sharpe ratio
B. Treynor measure
C. Jensen measure
D. appraisal ratio

28.28. In creating the P* portfolio, one mixes the original portfolio P and T-bills to
match the _________ of the market.
A. alpha
B. beta
C. excess return
D. standard deviation
29.The M2 measure of portfolio performance was developed by ______________.
A. Modigliani and Miller
B. Modigliani and Modigliani
C. Merton and Miller
D. Fama and French
30.Probably the biggest problem with evaluating the portfolio performance of
actively managed funds is the assumption that __________________________.
A. the markets are efficient
B. portfolio risk is constant over time
C. diversification pays off
D. security selection is more valuable than asset allocation
31.Perfect-timing ability is equivalent to having __________ on the market portfolio.
A. a call option
B. a futures contract
C. a put option
D. a forward contract

32.One hundred fund managers enter a contest to see how many times in 13 years
they can earn a higher return than their competitors. The probability distribution of
the number of successful years out of 13 for the best-performing money managers
is
Out of this sample, chance alone would indicate that there is a ______ probability
that someone would beat the market at least 11 times out of 13 years.
A. 51.3%
B. 65.9%
C. 67.1%
D. 10.83%
33.The Treynor-Black model is a model that shows how an investment manager can
use security analysis and statistics to construct __________.
A. a market portfolio
B. a passive portfolio
C. an active portfolio
D. an index portfolio
34.If an investor is a successful market timer, his distribution of monthly portfolio
returns will __________.
A. be skewed to the left
B. be skewed to the right
C. exhibit kurtosis
D. exhibit neither skewness nor kurtosis

35.Recent analysis indicates that the style of investing is a critical component of fund
performance. In fact, on average about _____ of fund performance is attributable
to the asset allocation decision.
A. 68%
B. 74%
C. 88%
D. 97%
36.In the Treynor-Black model, the active portfolio will contain stocks with
__________.
A. alphas equal to zero
B. negative alphas
C. positive alphas
D. some negative and some positive alphas
37.Portfolio performance is often decomposed into various subcomponents, such as
the return due to:
I. Broad asset allocation across security classes
II. Sector weightings within equity markets
III. Security selection with a given sector
The one decision that contributes most to the fund performance is _____.
A. I
B. II
C. III
D. All contribute equally to fund performance.

38.The theory of efficient frontiers has __________.
A. no adherents among practitioners
B. a small number of adherents among practitioners
C. a significant number of adherents among practitioners
D. complete support by practitioners
39.In the Treynor-Black model, security analysts __________.
A. analyze a relatively small number of stocks
B. analyze all stocks that are publicly traded
C. are redundant
D. devote their attention to market timing rather than fundamental analysis
40.In the Treynor-Black model, security analysts __________.
A. analyze the entire universe of stocks
B. assume that markets are inefficient
C. treat market index as a baseline portfolio from which an active portfolio is
constructed
D. focus on selecting the best-performing bogey
41.Active portfolio management consists of:
I. Market timing
II. Security selection
III. Sector selection within given markets
IV. Indexing
A. I and II only
B. II and III only
C. I, II, and III only
D. I, II, III, and IV

42.A market-timing strategy is one in which asset allocation in the stock market
__________ when one forecasts that the stock market will outperform Treasury
bills.
A. decreases
B. increases
C. remains the same
D. may increase or decrease
43.In the Treynor-Black model, the contribution of individual security to the active
portfolio should be based primarily on the stock's _________.
A. alpha
B. beta
C. residual variance
D. information ratio
44.If all ______ are ______ in the Treynor-Black model, there would be no reason to
depart from the passive portfolio.
A. alphas; zero
B. alphas; positive
C. betas; positive
D. standard deviations; positive
45.In the Treynor-Black model, the weight of each analyzed security in the portfolio
should be proportional to its __________.
A. alpha/beta
B. alpha/residual variance
C. beta/residual variance
D. none of these options

46.The critical variable in the determination of the success of the active portfolio is
the stock's __________.
A. alpha/nonsystematic risk ratio
B. alpha/systematic risk ratio
C. delta/nonsystematic risk ratio
D. delta/systematic risk ratio
47.Consider the theory of active portfolio management. Stocks A and B have the
same positive alpha and the same nonsystematic risk. Stock A has a higher beta
than stock B. You should want __________ in your active portfolio.
48.Consider the theory of active portfolio management. Stocks A and B have the
same beta and nonsystematic risk. Stock A has a higher positive alpha than stock
B. You should want __________ in your active portfolio.

49.The market-timing form of active portfolio management relies on __________
forecasting, and the security selection form of active portfolio management relies
on __________ forecasting.
A. macroeconomic; macroeconomic
B. macroeconomic; microeconomic
C. microeconomic; macroeconomic
D. microeconomic; microeconomic
50.Active portfolio managers try to construct a risky portfolio with _______.
A. a higher Sharpe ratio than a passive strategy
B. a lower Sharpe ratio than a passive strategy
C. the same Sharpe ratio as a passive strategy
D. very few securities
51.In performance measurement, the bogey portfolio is designed to _________.
A. measure the returns to a completely passive strategy
B. measure the returns to a similar active strategy
C. measure the returns to a given investment style
D. equal the return on the S&P 500
52.__________ portfolio managers experience streaks of abnormal returns that are
hard to label as lucky outcomes, and _________ anomalies in realized returns
have been sufficiently persistent that portfolio managers could use them to beat a
passive strategy over prolonged periods.
A. No; no
B. No; some
C. Some; no
D. Some; some

53.A passive benchmark portfolio is:
I. A portfolio in which the asset allocation across broad asset classes is neutral and
not determined by forecasts of performance of the different asset classes
II. One in which an indexed portfolio is held within each asset class
III. Often called the bogey
A. I only
B. I and III only
C. II and III only
D. I, II, and III
54.The correct measure of timing ability is ____________ for a portfolio manager
who correctly forecasts 55% of bull markets and 55% of bear markets.
A. -5%
B. 5%
C. 10%
D. 95%
55.It is very hard to statistically verify abnormal fund performance because of all of
the following except which one?
A. Inevitably, some fund managers experience streaks of good performance that
may just be due to luck.
B. The noise in realized rates of return is so large as to make it hard to identify
abnormal performance in competitive markets.
C. Portfolio composition is rarely stable long enough to identify abnormal
performance.
D. Even if successful, there is really not much value to be added by active
strategies such as market timing.

56.The term alpha transport refers to _____.
A. establishing alpha and then using index products to hedge market exposure and
reduce exposure to particular sectors.
B. establishing alpha and then using sector mutual funds to hedge market exposure
and reduce exposure to the general market.
C. establishing alpha and then using sector mutual funds to hedge market exposure
and gain exposure to the general market.
D. establishing alpha and then using index products to hedge market exposure and
gain exposure to particular sectors.
57.Portfolio managers Martin and Krueger each manage $1 million funds. Martin has
perfect foresight, and the call option value of his perfect foresight is $150,000.
Krueger is an imperfect forecaster and correctly predicts 50% of all bull markets
and 70% of all bear markets. The correct measure of timing ability for Krueger is
__________.
A. 20%
B. 60%
C. 75%
D. 120%
58.Portfolio managers Martin and Krueger each manage $1 million funds. Martin has
perfect foresight, and the call option value of his perfect foresight is $150,000.
Krueger is an imperfect forecaster and correctly predicts 50% of all bull markets
and 70% of all bear markets. The value of Krueger's imperfect forecasting ability
is __________.
A. $30,000
B. $67,500
C. $108,750
D. $217,500

59.Douglass, an imperfect forecaster, correctly predicts 57% of all bull markets and
68% of all bear markets. Simmonds is a perfect forecaster. If Douglass is able to
charge a fee of $125,000, the fee that Roy Simmonds should charge is
__________. Assume that both forecasters manage similar-size funds.
A. $31,250
B. $200,000
C. $500,000
D. $625,000
60.A mutual fund invests in large-capitalization stocks. Its performance should be
measured against which one of the following?
A. Russell 2000 Index
B. S&P 500 Index
C. Wilshire 5000 Index
D. Dow Jones Industrial Average
61.Assume you purchased a rental property for $100,000 and sold it 1 year later for
$115,000 (there was no mortgage on the property). At the time of the sale, you
paid $3,000 in commissions and $1,000 in taxes. If you received $10,000 in rental
income (all received at the end of the year), what annual rate of return did you
earn?
A. 6%
B. 11%
C. 21%
D. 25%

62.The table presents the actual return of each sector of the manager's portfolio in
column (1), the fraction of the portfolio allocated to each sector in column (2), the
benchmark or neutral sector allocations in column (3), and the returns of sector
indexes in column 4.
What was the manager's return in the month?
A. 2.07%
B. 2.21%
C. 2.24%
D. 4.8%
What was the bogey's return in the month?
A. 2.07%
B. 2.21%
C. 2.24%
D. 4.8%

What was the manager's over- or underperformance for the month?
A. Underperformance = .03%
B. Overperformance = .03%
C. Overperformance = .14%
D. Underperformance = 3%
What is the contribution of security selection to relative performance?
A. -.15%
B. .15%
C. -.3%
D. .3%

What is the contribution of asset allocation to relative performance?
A. -.18%
B. .18%
C. -.15%
D. .15%
67.Morningstar's RAR produce results that are similar but not identical to ________.
A. Jensen's alpha
B. M2
C. the Treynor ratio
D. the Sharpe ratio
68.The Treynor-Black model assumes that security markets are _________.
A. completely efficient
B. nearly efficient
C. very inefficient
D. random walks

69.The information ratio is equal to the stock's ____ divided by its ______.
A. diversifiable risk; beta
B. beta; alpha
C. alpha; beta
D. alpha; diversifiable risk
70.Empirical tests to date show ______________.
A. that many investors have earned large rewards by market timing
B. little evidence of market-timing ability
C. clear-cut evidence of substantial market-timing ability
D. evidence that absolutely no market-timing ability exists
71.A portfolio generates an annual return of 13%, a beta of .7, and a standard
deviation of 17%. The market index return is 14% and has a standard deviation of
21%. What is the M2 measure of the portfolio if the risk-free rate is 5%?
A. .58%
B. .68%
C. .78%
D. .88%
72.A portfolio generates an annual return of 17%, a beta of 1.2, and a standard
16%. What is the M2 measure of the portfolio if the risk-free rate is 4%?
A. 2.15%
B. 2.76%
C. 2.94%
D. 3.14%

21%. What is the Treynor measure of the portfolio if the risk-free rate is 5%?
A. .1143
B. .1233
C. .1354
D. .1477
16%. What is the Treynor measure of the portfolio if the risk-free rate is 6%?
A. .0833
B. .1083
C. .1114
D. .1163
21%. What is the Sharpe measure of the portfolio if the risk-free rate is 5%?
A. .3978
B. .4158
C. .4563
D. .4706

16%. What is the Sharpe ratio of the portfolio if the risk-free rate is 6%?
A. .4757
B. .5263
C. .6842
D. .7252
21%. What is Jensen's alpha of the portfolio if the risk-free rate is 5%?
A. .017
B. .034
C. .067
D. .078
16%. What is Jensen's alpha of the portfolio if the risk-free rate is 6%?
A. .017
B. .028
C. .036
D. .078

79.The portfolio that contains the benchmark asset allocation against which a
manager will be measured is often called _____________.
A. the bogey portfolio
B. the Vanguard Index
C. Jensen's alpha
D. the Treynor measure
80.An attribution analysis will not likely contain which of the following
components?
A. Asset allocation
B. Index returns
C. Risk-free returns
D. Security selection
81.Which of the following investment strategies would have produced the highest
returns in the time period since 1926?
A. T-bills portfolio
B. S&P 500 Index fund
C. Perfect market timing
D. Random stock selection
82.What phrase might be used as a substitute for the Treynor-Black model developed
in 1973?
A. Solely active management
B. Enhanced index approach
C. Passive management
D. Random selection

83.What is the term for the process used to assess portfolio manager performance?
A. Active analysis
B. Attribution analysis
C. Passive analysis
D. Treynor-Black Analysis
84.A fund has excess performance of 1.5%. In looking at the fund's investment
breakdown, you see that the fund overweighted equities relative to the benchmark
and that the average return on the fund's equity portfolio was slightly lower than
the equity benchmark return. The excess performance for this fund is probably due
to _______________.
A. security selection ability
B. better sector weightings in the equity portfolio
C. the asset allocation decision
D. finding securities with positive alphas
85.For a market timer, the _____________ will be higher when RM is higher.
A. portfolio's alpha and beta
B. portfolio's unsystematic risk
C. portfolio's beta and slope of the characteristic line
D. security selection component of the portfolio

86.The Treynor-Black model combines an actively managed portfolio with an
efficiently diversified portfolio in order to:
I. Improve the diversification of the overall portfolio
II. Improve the overall portfolio's Sharpe ratio
III. Reach a higher CAL than would otherwise be possible
A. I only
B. I and II only
C. II and III only
D. I, II, and III

Fin 320 week 9 quiz – strayer

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