Chapter 9

Question 1

The higher a portfolio’s Sharpe ratio, the better its:
Select one:
a. performance against the benchmark.
b. performance against an Exchange Traded Note.
c. diversification.
d. risk adjusted performance has been.

Answer 1

d. risk adjusted performance has been.

SEE CHAPTER 9B2A

Question 2

What is the alpha of a fund that has provided an average return of 12% per year, if the fund has a beta of 1.5, the return on the market was 8%, and the risk-free rate was 2%?
Select one:
a. 1%.
b. 1.5%. 
c. 4%.
d. 2%.

Answer 2

a. 1%.

SEE CHAPTER 9B2B

Question 3

Joshua has just completed a calculation but thinks the results are skewed to the timing of new monies added to the fund. He has therefore calculated the:
Select one:
a. time-weighted return.
b. Sharpe ratio.
c. standard deviation.
d. money-weighted return.

Answer 3

d. money-weighted return.

SEE CHAPTER 9B1A

Question 4

Which statement is correct regarding the money weighted rate of return?
Select one:
a. It is the only way to avoid the skew caused by the effect of funds being invested or withdrawn.
b. It is the best way to appraise fund managers since it includes funds being invested or withdrawn.
c. It is a good way to appraise managers since it ignores the effect of funds being invested or withdrawn.
d. It is not always an appropriate way to compare the relative performances of fund managers due to the effect of funds being invested or withdrawn.

Answer 4

d. It is not always an appropriate way to compare the relative performances of fund managers due to the effect of funds being invested or withdrawn.

SEE CHAPTER 9B1A

Question 5

In respect of money-weighted return, it would be TRUE to say that it:
Select one:
a. should be used in isolation with one fund.
b. should be used for comparison purposes across two similar funds.
c. does not take timing of withdrawals into account.
d. does not take dividend income into account.

Answer 5

a. should be used in isolation with one fund.

SEE CHAPTER 9B1A

Question 6

Javid's fund produced a return of 11% and was expected to return 9%, where beta was 1.15. This would result in a:
Select one:
a. high standard deviation.
b. negative Sharpe ratio.
c. positive alpha. 
d. negative information ratio.

Answer 6

c. positive alpha.

SEE CHAPTER 9B2B

Question 7

Stuart invested £60,000 at the start of the year but withdrew £20,000 after 6 months. He earned income on his investment of £750 and at the end of the year his investment was worth £42,000. What is the money weighted rate of return on his investment?
Select one:
a. 3.33%. 
b. 5%.
c. 5.5%.
d. 4%.

Answer 7

c. 5.5%.

SEE CHAPTER 9B1A

Question 8

George invested £30,000 at the start of the year. At the end of the year his investment was worth £45,000. He had received income of £900 on the investment during the year. What is the money weighted rate of return on his investment?
Select one:
a. 25%.
b. 35%. 
c. 50%.
d. 53%.

Answer 8

d. 53%.

SEE CHAPTER 9B1A

Question 9

What is the information ratio for a fund that has provided an average return of 13% per year compared with a benchmark return of 10%, if the fund has a tracking error of 6%?
Select one:
a. 4. 
b. -3.
c. 1.5.
d. 0.5.

Answer 9

d. 0.5.

SEE CHAPTER 9B2C

Question 10

When looking at a Sharpe ratio, as volatility:
Select one:
a. decreases, the Sharpe ratio decreases.
b. increases, the Sharpe ratio increases.
c. increases, the Sharpe ratio decreases.
d. decreases, the Sharpe ratio does not alter.

Answer 10

c. increases, the Sharpe ratio decreases.

SEE CHAPTER 9B2A

Question 11

A given benchmark had 40% in equities and equities performed at 20%. This shows that:
Select one:
a. an active fund would have performed better than the benchmark.
b. the benchmark return was positive.
c. the benchmark return was negative.
d. equities gave an 8% contribution to return.

Answer 11

d. equities gave an 8% contribution to return.

SEE CHAPTER 9C

Question 12

What is the Sharpe ratio of a fund that has provided an average return of 12% per year, if the fund has a beta of 1.5, a standard deviation of 12, the return on the market was 8%, and the risk-free rate was 2%?
Select one:
a. 6.67.
b. 0.83. 
c. 1.
d. 5.33.

Answer 12

b. 0.83.

SEE CHAPTER 9B2A

Question 13

An investment portfolio has an annualised rate of return of 10% compared to a 4% annual return from a risk-free investment. The standard deviation of the portfolio is 8%. What is the Sharpe ratio?
Select one:
a. 10.
b. 4. 
c. 0.75.
d. 8.

Answer 13

c. 0.75.

SEE CHAPTER 9B2A

Question 14

The alpha for fund X is 4.1% and the alpha for fund Y is 2.1%. This means that:
Select one:
a. fund Y had a higher beta than fund X.
b. fund X had a higher beta than fund Y. I
c. the fund manager of Y had better stock picking skills than the fund manager of X.
d. the fund manager of X had better stock picking skills than the fund manager of Y.

Answer 14

d. the fund manager of X had better stock picking skills than the fund manager of Y.

SEE CHAPTER 9B2B

Question 15

Which statement is correct regarding the time weighted rate of return?
Select one:
a. It is not as accurate as the money weighted measure.
b. It ignores inflows and outflows so is a ‘purer’ measure.
c. It is a fairer measure of the skill of the fund manager compared with the money weighted rate of return.
d. It always returns a higher figure to the money weighted rate of return and therefore is preferred by fund managers.

Answer 15

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

SEE CHAPTER 9B1B

Question 16

A portfolio manager is considering which benchmark to use when launching a new fund. This is important because:
Select one:
a. this will determine the asset allocation he will have to use in the new fund.
b. under-performing against the benchmark will always result in a negative return.
c. if the fund is underweight when compared to the benchmark, it would lead to the fund under-performing.
d. it would be used to determine his performance as an investment manager.

Answer 16

d. it would be used to determine his performance as an investment manager.

SEE CHAPTER 9C

Question 17

In respect of time-weighted return, it would be TRUE to say that it:
Select one:
a. takes the timing of withdrawals into account.
b. is always higher than money-weighted return.
c. should be used for comparison purposes.
d. does not consider the valuation of the portfolio when an addition to the fund is made.

Answer 17

c. should be used for comparison purposes.

SEE CHAPTER 9B1B

Question 18

Stephen, a veteran fund manager, has superior stock picking skills compared with his peers. Which statement is MOST likely to be true regarding the key investment ratios?
Select one:
a. He has negative beta, a low Sharpe ratio and a high information ratio.
b. He has negative alpha, a high Sharpe ratio and a high information ratio.
c. He has positive alpha, a low Sharpe ratio and a low information ratio.
d. He has positive alpha, a high Sharpe ratio and a high information ratio.

Answer 18

d. He has positive alpha, a high Sharpe ratio and a high information ratio.

SEE CHAPTER 9B2

Question 19

A negative information ratio means that an investor:
Select one:
a. has a portfolio with relatively high levels of volatility.
b. would probably have achieved a better return by matching the index using a tracker or index fund.
c. is over-exposed to higher risk securities.
d. has had their investment eroded in real terms.

Answer 19

b. would probably have achieved a better return by matching the index using a tracker or index fund.

SEE CHAPTER 9B2C

Question 20

Grant has been told that his share has a positive alpha. This indicates that his security has:
Select one:
a. been riskier than the market average.
b. performed worse than the appropriate benchmark.
c. performed worse than would be predicted given its beta.
d. performed better than would be predicted given its beta.

Answer 20

d. performed better than would be predicted given its beta.

SEE CHAPTER 9B2B

Question 21

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

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

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

Answer 21

b. Time-weighted.
d. Money-weighted.

SEE CHAPTER 9B1

Question 22

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

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

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

Answer 22

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

SEE CHAPTER 9B1B

Question 23

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

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

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

Answer 23

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

SEE CHAPTER 9B1A

Question 24

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

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

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

Answer 24

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

SEE CHAPTER 9C

Question 25

Performance evaluation focuses on: You must select ALL the correct options to gain the mark: a. the added value achieved relative to the benchmark. b. the actual investment return over a stated period. c. how the investment return was achieved. d. making a judgment about the most suitable future asset classes. e. maximising the investment return whilst minimising the volatility.

Answer 25

a. the added value achieved relative to the benchmark. c. how the investment return was achieved. SEE CHAPTER 9B

Question 26

When looking at the investment performance of a fund, it would be desirable to see a: You must select ALL the correct options to gain the mark: a. negative information ratio. b. high tracking error. c. relatively low Sharpe ratio. d. positive alpha. e. high time weighted rate of return.

Answer 26

d. positive alpha. e. high time weighted rate of return. SEE CHAPTER 9B2

Question 27

A client invested £200,000 at the start of the year and added £50,000 after 6 months when the portfolio was worth £180,000. The value at the end of the year was £300,000. The index went up by 15% during the year. It is TRUE to say that: You must select ALL the correct options to gain the mark: a. based on the time weighted rate of return, the fund manager produced positive alpha. b. the client reduced the performance of the fund by adding money when he did. c. the money weighted rated of return was higher than the return on the index. d. the money weighted rate of return was higher than the time weighted rate of return.

Answer 27

a. based on the time weighted rate of return, the fund manager produced positive alpha. c. the money weighted rated of return was higher than the return on the index. d. the money weighted rate of return was higher than the time weighted rate of return. SEE CHAPTER 9B1

Question 28

A client calculated that his money weighted rate of return was 9% whilst the time weighted return was 6%. The index returned 7%. This means that the: You must select ALL the correct options to gain the mark: a. client did not introduce or take money out of the portfolio during the year. b. timing of the client was poor. c. outperformance was primarily down to the client not the fund manager. d. fund manager produced negative alpha.

Answer 28

c. outperformance was primarily down to the client not the fund manager. d. fund manager produced negative alpha. SEE CHAPTER 9B

Question 29

Portfolio A has an annualised return of 12% and a standard deviation of the portfolio is 9%. Portfolio B has an annualised return of 10% and a standard deviation of 5%. If the annual return from a risk-free investment is 4% it is TRUE to say that: You must select ALL the correct options to gain the mark: a. the fund manager of portfolio A has taken more risk than the fund manager of portfolio B. b. the fund manager of portfolio A has achieved a higher return on a risk adjusted basis. c. portfolio B has a lower Sharpe ratio than portfolio A. d. portfolio B has a Sharpe ratio of 1.2.

Answer 29

a. the fund manager of portfolio A has taken more risk than the fund manager of portfolio B. d. portfolio B has a Sharpe ratio of 1.2. SEE CHAPTER 9B2A

Question 30

Sally's adviser has explained to her the impact that the time-weighted rate of return will have on her investments. However, the information her adviser provided wasn't entirely accurate. Which statement made by the adviser is INCORRECT? Select one: a. "You can't use the time-weighted return to compare me to another fund manager." b. "I'll look to revalue the portfolio every time there is an in-flow or out-flow of cash to or from your investment." c. "I establish the time-weighted return by compounding the returns for each period." d. "Time-weighted returns attempt to eliminate distortions caused by the introduction of new money to an investment."

Answer 30

a. "You can't use the time-weighted return to compare me to another fund manager." SEE CHAPTER 9B1B

Question 31

Wayne wants to use risk adjusted measurements of the return on the funds within his portfolio. Which measurements would enable him to do so? You must select ALL the correct options to gain the mark: a. Sharpe ratio. b. Money weighted rate of return. c. Information ratio. d. Time weighted rate of return.

Answer 31

a. Sharpe ratio. c. Information ratio. SEE CHAPTER 9B2

Question 32

Investment A has a Sharpe ratio of 0.9 and investment B has a Sharpe ratio of 1.25. This would indicate that: You must select ALL the correct options to gain the mark: a. investment B offers a better level of compensation for the risk taken. b. investment A has taken less risk than investment B. c. a risk free asset would have performed better than investment A. d. if the risk free ratio was 2% and the standard deviation of A was 3.33% then it must have returned 5%. e. investment B returned 35% more than investment A.

Answer 32

a. investment B offers a better level of compensation for the risk taken. d. if the risk free ratio was 2% and the standard deviation of A was 3.33% then it must have returned 5%. SEE CHAPTER 9B2A

Question 33

An adviser is using the information ratio to assess the risk-adjusted performance of a discretionary portfolio. It would be INCORRECT to say that: Select one: a. it is calculated by dividing the relative return of the fund by the tracking error. b. the higher the information ratio, the lower the value added by the manager through active management. c. it shows the consistency with which a fund manager beats a benchmark index. d. it is used to assess the risk-adjusted performance of active fund managers.

Answer 33

b. the higher the information ratio, the lower the value added by the manager through active management. SEE CHAPTER 9B2C

Question 34

The return achieved by a portfolio manager is PRIMARILY determined by their use of: You must select ALL the correct options to gain the mark: a. past performance. b. market timing. c. stock selection. d. optimisation. e. economic forecasts.

Answer 34

b. market timing. c. stock selection. SEE CHAPTER 9C

Question 35

An investment portfolio has a beta of 0.9, a standard deviation of 8% and an annualised return of 9%. The annual return on the market was 10% and there was a 2% annual return from a risk-free investment. It is true to say that: You must select ALL the correct options to gain the mark: a. the Sharpe ratio was lower than its beta. b. there was a positive Sharpe ratio. c. the fund was expected to return 9.2% under CAPM. d. the fund produced positive alpha. e. the fund was more volatile than the market.

Answer 35

a. the Sharpe ratio was lower than its beta. Correct Correct, chapter reference 9B2A b. there was a positive Sharpe ratio. c. the fund was expected to return 9.2% under CAPM. SEE CHAPTER 9B2A

Question 36

A client invested £80,000 at the start of the year and withdrew £20,000 after 6 months when the portfolio was worth £85,000. The value was £70,000 at the end of the year. The index went up by 10% during the year. It is TRUE to say that: You must select ALL the correct options to gain the mark: a. the money-weighted rated of return was lower than the return on the index. b. based on the time-weighted rate of return, the fund manager produced positive alpha. c. the money-weighted rate of return was lower than the time weighted rate of return. d. the client improved the performance of the fund by withdrawing money when he did.

Answer 36

b. based on the time-weighted rate of return, the fund manager produced positive alpha. c. the money-weighted rate of return was lower than the time weighted rate of return. SEE CHAPTER 9B1

Question 37

Pavlos has been told by his adviser about the importance of a stock's 'alpha'. In particular, a: Select one: a. positive alpha indicates the stock has performed better than its beta predicted. b. negative alpha indicates the stock has performed better than other investments in the client's portfolio. c. negative alpha indicates the stock has performed worse than other investments in the client's portfolio. d. positive alpha indicates the stock has performed worse that its beta predicted.

Answer 37

a. positive alpha indicates the stock has performed better than its beta predicted. SEE CHAPTER 9B2B

Question 38

Sasha is attempting to evaluate the performance of Don, her investment manager. The key issues that Sasha should take into account are: You must select ALL the correct options to gain the mark: a. the money-weighted rate of return. b. the value Don added relative to the chosen benchmark. c. the levels of risk Don took to achieve the returns. d. the liability for capital gains tax from the portfolio. e. the total funds under management.

Answer 38

b. the value Don added relative to the chosen benchmark. c. the levels of risk Don took to achieve the returns. SEE CHAPTER 9B

Question 39

When using the money-weighted rate of return to calculate the return from a portfolio, an adviser should be aware that: You must select ALL the correct options to gain the mark: a. reinvested income must be taken into account in the calculation. b. it measures the overall return on capital invested over a specific period. c. income and capital distributions made from the portfolio are not taken into account. d. the investment industry refers to it as the internal rate of return. e. the calculation can be modified to allow for any new funds which are invested during the year.

Answer 39

b. it measures the overall return on capital invested over a specific period. d. the investment industry refers to it as the internal rate of return. e. the calculation can be modified to allow for any new funds which are invested during the year. SEE CHAPTER 9B1A

Question 40

The performance of an existing portfolio is being compared with its benchmark. The asset allocation of the benchmark is 60% UK equities, 30% overseas equities, 5% fixed interest and 5% cash. If the performance of these assets over the period was 15%, 13%, 3% and 2% respectively, this means that the return of: You must select ALL the correct options to gain the mark: a. UK equities would be 8.7% in this benchmark portfolio. b. cash would be 1.5% in this benchmark portfolio. c. overseas equities would be 3.9% in this benchmark portfolio. d. fixed interest would be 9.5% in this benchmark portfolio. e. UK equities would be 9% in this benchmark portfolio.

Answer 40

c. overseas equities would be 3.9% in this benchmark portfolio. e. UK equities would be 9% in this benchmark portfolio. SEE CHAPTER 9C

Question 41

When using beta to measure the volatility of individual securities, a financial adviser should be aware that: You must select ALL the correct options to gain the mark: a. it allows the adviser to quantify the value added or taken away by a manager through active management. b. a security with a beta of 1 will move up and down broadly with the market. c. a security with a beta of more than 1 is perfectly correlated with the market. d. a security with a beta of less than 1 but more than zero is more volatile than the market. e. it measures volatility relative to the market as a whole.

Answer 41

b. a security with a beta of 1 will move up and down broadly with the market. e. it measures volatility relative to the market as a whole. SEE CHAPTER 9A1

Question 42

If alpha is used to review the performance of a portfolio, an adviser should be aware that: You must select ALL the correct options to gain the mark: a. a negative alpha can result from the effect of fund management expenses. b. it measures the excess return for every unit of risk taken. c. it is the return explained by the capital asset pricing model. d. it cannot be used with fixed interest funds. e. it is an indication of added value.

Answer 42

a. a negative alpha can result from the effect of fund management expenses. e. it is an indication of added value. SEE CHAPTER 9B2B

Question 43

A Sharpe Ratio of 2.2 for a fund indicates: You must select ALL the correct options to gain the mark: a. if the fund had performed marginally better than cash, then volatility must have been extremely low. b. the fund has performed better than cash. c. the fund has performed better than a relative benchmark. d. that equities have been the best performing asset class. e. if the fund had performed marginally better than cash, then volatility must have been extremely high.

Answer 43

a. if the fund had performed marginally better than cash, then volatility must have been extremely low. b. the fund has performed better than cash. SEE CHAPTER 9B2A

Question 44

A client has invested money at the start of the year and has not touched the capital nor received any income during the year. It is TRUE to say that: You must select ALL the correct options to gain the mark: a. the holding period return will and the time weighted rate of return will always be the same. b. the time weighted return and the holding period return will be a good measure of the fund manager's performance. c. the holding period return will always be lower than if he had added more money half way through the period. d. the holding period return will be the same as the money weighted rate of return.

Answer 44

b. the time weighted return and the holding period return will be a good measure of the fund manager's performance. d. the holding period return will be the same as the money weighted rate of return. SEE CHAPTER 9B1