WKU FIN 331 FINAL EXAM PART 1 2026/2027 – APPLIED INVESTMENTS STUDY
GUIDE, PRACTICE QUESTIONS & TEST PREP
How can an investor opt for investment with greater certainty? - correct answer ✔✔Picking correct
active fund manager
Picking an indexed fund
Benefits of Passive Investing - correct answer ✔✔Lower Costs
Lower turnover
Fund Objective for Passive Investing - correct answer ✔✔To beat the market
What is an index? - correct answer ✔✔is a generic term that describes a list of securities that are
selected and weighted according to a set of rules provided by an index originator
What is a benchmark? - correct answer ✔✔is a plain vanilla index and beta seeking index
Why has what qualifies as an index broadened over the past few years? - correct answer ✔✔The
introduction of more ETFS into the market that follow highly-customized nonstandard index methods
What kind of indexes should you buy? - correct answer ✔✔The benchmarks
What passive investors should care about - correct answer ✔✔Market and subsections of the market
returns
A proper benchmark should be: - correct answer ✔✔A viable alternative
Not easily beaten
Low in cost
identifiable before the fact
What should the benchmark represent? - correct answer ✔✔Before costs, is should represent the
aggregation of all active managers who participate in the asset class
Are all index funds passive? - correct answer ✔✔No, there are active index funds that are costly and
generally underperform the market
Consequences of an actively managed index fund - correct answer ✔✔Higher fees- double and triple the
fees of traditional index funds
Often leveraged
, Cowles Commission Report - correct answer ✔✔Studied 20 insurance companies and found that 6
outperformed and the rest outperformed. Showed that as an investor you are twice as likely to lose as
you are to win. Results were more consistent with luck rather than skill
When was the first open-end stock fund introduced - correct answer ✔✔1928
Who developed the risk-adjusted measure? - correct answer ✔✔William Sharpe
How is the Sharpe Ratio calculated? - correct answer ✔✔by using standard deviation and excess return
to determine reward per unit of risk.
The higher the Sharpe ratio, the _____________ the fund's risk-adjusted performance - correct answer
✔✔better
How often is the Sharpe Ratio re-calculated? - correct answer ✔✔Every month
What can the Sharpe Ratio be used for? - correct answer ✔✔To compare directly how much risk two
funds each had to bear to earn excess return over the risk-free rate
What is the Treynor Ratio? - correct answer ✔✔a measurement of efficiency utilizing the relationship
between annualized risk-adjusted return and risk
What is the difference between the Sharpe Ratio and the Treynor ratio? - correct answer ✔✔Treynor
Ratio utilizes "market" risk (beta) instead of total risk (standard deviation)
While using the Treynor ratio, good performance is indicated by a ____ ratio - correct answer ✔✔high
The Treynor is used to - correct answer ✔✔diversify non-market risk
What is Jensen's alpha? - correct answer ✔✔Portfolio return that can't be explained by beta. Found that
costs are often greater than risk-adjusted return
Who designed the first index fund? - correct answer ✔✔John Bogle, the founder of Vanguard, in 1976
Vanguard 500 Index Fund - correct answer ✔✔Beat 85% of all actively managed funds in a 25 year
period
Low Turnover
Low fees
Top echelon of performance
What is the Morningstar Tax Cost ratio - correct answer ✔✔It measures how much a fund's annualized
return is reduced by the taxes investors pay on distributions. Mutual funds regularly distribute stock
dividends, bond dividends and capital gains to their shareholders. Investors then must pay taxes on
those distributions during the year they were received.
GUIDE, PRACTICE QUESTIONS & TEST PREP
How can an investor opt for investment with greater certainty? - correct answer ✔✔Picking correct
active fund manager
Picking an indexed fund
Benefits of Passive Investing - correct answer ✔✔Lower Costs
Lower turnover
Fund Objective for Passive Investing - correct answer ✔✔To beat the market
What is an index? - correct answer ✔✔is a generic term that describes a list of securities that are
selected and weighted according to a set of rules provided by an index originator
What is a benchmark? - correct answer ✔✔is a plain vanilla index and beta seeking index
Why has what qualifies as an index broadened over the past few years? - correct answer ✔✔The
introduction of more ETFS into the market that follow highly-customized nonstandard index methods
What kind of indexes should you buy? - correct answer ✔✔The benchmarks
What passive investors should care about - correct answer ✔✔Market and subsections of the market
returns
A proper benchmark should be: - correct answer ✔✔A viable alternative
Not easily beaten
Low in cost
identifiable before the fact
What should the benchmark represent? - correct answer ✔✔Before costs, is should represent the
aggregation of all active managers who participate in the asset class
Are all index funds passive? - correct answer ✔✔No, there are active index funds that are costly and
generally underperform the market
Consequences of an actively managed index fund - correct answer ✔✔Higher fees- double and triple the
fees of traditional index funds
Often leveraged
, Cowles Commission Report - correct answer ✔✔Studied 20 insurance companies and found that 6
outperformed and the rest outperformed. Showed that as an investor you are twice as likely to lose as
you are to win. Results were more consistent with luck rather than skill
When was the first open-end stock fund introduced - correct answer ✔✔1928
Who developed the risk-adjusted measure? - correct answer ✔✔William Sharpe
How is the Sharpe Ratio calculated? - correct answer ✔✔by using standard deviation and excess return
to determine reward per unit of risk.
The higher the Sharpe ratio, the _____________ the fund's risk-adjusted performance - correct answer
✔✔better
How often is the Sharpe Ratio re-calculated? - correct answer ✔✔Every month
What can the Sharpe Ratio be used for? - correct answer ✔✔To compare directly how much risk two
funds each had to bear to earn excess return over the risk-free rate
What is the Treynor Ratio? - correct answer ✔✔a measurement of efficiency utilizing the relationship
between annualized risk-adjusted return and risk
What is the difference between the Sharpe Ratio and the Treynor ratio? - correct answer ✔✔Treynor
Ratio utilizes "market" risk (beta) instead of total risk (standard deviation)
While using the Treynor ratio, good performance is indicated by a ____ ratio - correct answer ✔✔high
The Treynor is used to - correct answer ✔✔diversify non-market risk
What is Jensen's alpha? - correct answer ✔✔Portfolio return that can't be explained by beta. Found that
costs are often greater than risk-adjusted return
Who designed the first index fund? - correct answer ✔✔John Bogle, the founder of Vanguard, in 1976
Vanguard 500 Index Fund - correct answer ✔✔Beat 85% of all actively managed funds in a 25 year
period
Low Turnover
Low fees
Top echelon of performance
What is the Morningstar Tax Cost ratio - correct answer ✔✔It measures how much a fund's annualized
return is reduced by the taxes investors pay on distributions. Mutual funds regularly distribute stock
dividends, bond dividends and capital gains to their shareholders. Investors then must pay taxes on
those distributions during the year they were received.
