JINVESTMENTS CHAPTER 13
QUESTIONS WITH COMPLETE
SOLUTION
Which one of the following assesses the ability of a money manager to balance high returns with an
acceptable level of risk? - D. Performance evalutation
The unadjusted total percentage return on a security that has not been compared to any benchmark is
referred to as which one of the following? - A. raw return
The risk premium of a portfolio divided by the portfolio's standard deviation defines which one of the
following performance measures? - D. Sharpe ratio
Which one of the following is computed by dividing a portfolio's risk premium by the portfolio beta? - E.
Treynor ratio
Which one of the following measures a portfolio's raw return against the expected return based on the
Capital Asset Pricing Model? - C. Jensen's alpha
Which one of the following concerns a money manager's control over investment risks, particularly
potential short-run losses? - C. Investment risk management
Which one of the following assesses risk by stating the probability of a loss a portfolio might incur within
a stated time period given a specific probability? - E. Value-at-Risk
Which one of the following is a statistical model, defined by its mean and standard deviation, that is used
to assess probabilities? - B. normal distribution
Which one of the following measures a security's return in relation to the total risk associated with that
security? - C. Sharpe ratio
The Sharpe ratio measures a security's return relative to which one of the following? - A. total risk
The Sharpe ratio is best used to evaluate which one of the following? - E. diversified portfolios
Which one of the following measures returns in relation to total risk? - B. Sharpe ratio
Which one of the following values would be the most preferable as a Sharpe ratio? - E. 1.02
Which one of the following measures risk premium in relation to systematic risk? - E. Treynor ratio
You are comparing three securities and discover they all have identical Treynor ratios. Given this
information, which one of the following must be true regarding these three securities? - D. They earn
identical rewards per unit of systematic risk.
, You are comparing three assets which have differing Treynor ratios. Given this, which one of the
following must be true? - E. The preferred investment is the asset with the highest Treynor ratio.
You are considering the purchase of a mutual fund. You have found three funds that meet your basic
criteria. Each fund has a different alpha. Which alpha indicates the preferred investment? - E. the highest
positive alpha
Which one of the following statements is correct in relation to a security that has a negative Jensen's
alpha? - A. The security is overpriced and will plot below the security market line.
Which one of the following is the best indication that a security is correctly priced according to the
Capital Asset Pricing Model? - C. alpha of zero
Tony brags that his portfolio's rate of return is "beating the market". Which one of the following would
best substantiate his claim? - C. positive Jensen's alpha
Which of the following should generally only be used to evaluate relatively diversified portfolios rather
than individual securities?
I. Sharpe ratio
II. Treynor ratio
III. Jensen's alpha - A. I only
Which of the following measures are dependent upon the accuracy of a security's beta?
I. Sharpe ratio
II. Treynor ratio
III. Jensen's alpha - D. II and III only
Which one of the following is probably the best measure of the performance of a well-diversified
portfolio? - D. Sharpe ratio
Which of the following measures should be used to determine if a security should be included in a
master portfolio?
I. Sharpe ratio
II. Treynor ratio
III. Jensen's alpha - E. II and III only
The Jensen-Treynor alpha is equal to: - C. Jensen's alpha divided by beta.
QUESTIONS WITH COMPLETE
SOLUTION
Which one of the following assesses the ability of a money manager to balance high returns with an
acceptable level of risk? - D. Performance evalutation
The unadjusted total percentage return on a security that has not been compared to any benchmark is
referred to as which one of the following? - A. raw return
The risk premium of a portfolio divided by the portfolio's standard deviation defines which one of the
following performance measures? - D. Sharpe ratio
Which one of the following is computed by dividing a portfolio's risk premium by the portfolio beta? - E.
Treynor ratio
Which one of the following measures a portfolio's raw return against the expected return based on the
Capital Asset Pricing Model? - C. Jensen's alpha
Which one of the following concerns a money manager's control over investment risks, particularly
potential short-run losses? - C. Investment risk management
Which one of the following assesses risk by stating the probability of a loss a portfolio might incur within
a stated time period given a specific probability? - E. Value-at-Risk
Which one of the following is a statistical model, defined by its mean and standard deviation, that is used
to assess probabilities? - B. normal distribution
Which one of the following measures a security's return in relation to the total risk associated with that
security? - C. Sharpe ratio
The Sharpe ratio measures a security's return relative to which one of the following? - A. total risk
The Sharpe ratio is best used to evaluate which one of the following? - E. diversified portfolios
Which one of the following measures returns in relation to total risk? - B. Sharpe ratio
Which one of the following values would be the most preferable as a Sharpe ratio? - E. 1.02
Which one of the following measures risk premium in relation to systematic risk? - E. Treynor ratio
You are comparing three securities and discover they all have identical Treynor ratios. Given this
information, which one of the following must be true regarding these three securities? - D. They earn
identical rewards per unit of systematic risk.
, You are comparing three assets which have differing Treynor ratios. Given this, which one of the
following must be true? - E. The preferred investment is the asset with the highest Treynor ratio.
You are considering the purchase of a mutual fund. You have found three funds that meet your basic
criteria. Each fund has a different alpha. Which alpha indicates the preferred investment? - E. the highest
positive alpha
Which one of the following statements is correct in relation to a security that has a negative Jensen's
alpha? - A. The security is overpriced and will plot below the security market line.
Which one of the following is the best indication that a security is correctly priced according to the
Capital Asset Pricing Model? - C. alpha of zero
Tony brags that his portfolio's rate of return is "beating the market". Which one of the following would
best substantiate his claim? - C. positive Jensen's alpha
Which of the following should generally only be used to evaluate relatively diversified portfolios rather
than individual securities?
I. Sharpe ratio
II. Treynor ratio
III. Jensen's alpha - A. I only
Which of the following measures are dependent upon the accuracy of a security's beta?
I. Sharpe ratio
II. Treynor ratio
III. Jensen's alpha - D. II and III only
Which one of the following is probably the best measure of the performance of a well-diversified
portfolio? - D. Sharpe ratio
Which of the following measures should be used to determine if a security should be included in a
master portfolio?
I. Sharpe ratio
II. Treynor ratio
III. Jensen's alpha - E. II and III only
The Jensen-Treynor alpha is equal to: - C. Jensen's alpha divided by beta.
