likaiba

 

6、The Treynor measure is correctly defined as a measure of a fund’s:

A) return earned compared to its systematic risk.

B) return earned compared to its unsystematic risk. 

C) excess return earned compared to its total risk. 

D) excess earned compared to its systematic risk. 

likaiba

 

The correct answer is D

The Treynor measure is defined as a fund’s excess return (fund’s return minus the risk-free rate) divided by its systematic risk (beta).

likaiba

 

7、Of the Sharpe, Treynor, and Jensen’s Alpha measures, when measuring the risk/return performance of actively managed portfolios, which is the most appropriate to use?

A) Treynor measure.

B) Sharpe ratio.

C) All three measures are equally appropriate.

D) Jensen's Alpha.

likaiba

 

The correct answer is D

Jensen’s Alpha measures the value added of an active portfolio strategy.

likaiba

 

8、An analyst has gathered the following information about the performance of an equity fund and the S& 500 index over the same time period.  

                                                         Equity Fund            S& 500

                    Return                                -12%                    -16%        

                    Standard Deviation                15%                     19%

                    Beta                                  1.18                     1.00

                    Risk-free rate is 6.00%

The difference between the Treynor measure for the equity fund and the Treynor measure for the S& 500 is:

A)    0.07.

B)    0.17.

C)   0.15.

D)   0.21.

likaiba

 

The correct answer is A

The equity fund: (-0.12 – 0.06)/1.18 = -0.15

The S& 500: (-0.16 – 0.06)/1.00 = -0.22

The equity fund is (-0.15 – (-0.22) = 0.07 higher

 

likaiba

 

9、An analyst has generated the following information about risk/return performance using the Sharpe ratio and the Treynor measure:

                                                            Equity Fund         S& 500

                           Sharpe ratio                     0.47                  0.42

                           Treynor measure              0.31                  0.34

Which of the following statements about the relative risk/return performance of the funds is TRUE?  The:

A)    Treynor measure shows the fund outperformed the S& 500 on a systematic risk-adjusted basis.

B)    Sharpe ratio shows the equity fund underperformed the S& 500 on a systematic risk-adjusted basis.

C)   Sharpe ratio shows the equity fund outperformed the S& 500 on a total risk- adjusted basis.

D)   Treynor measure shows the fund underperformed the S& 500 on a total risk-adjusted basis.

likaiba

 

The correct answer is C

With either the Sharpe or Treynor methodology, a higher number means a higher risk-adjusted return. Since the Sharpe ratio is 0.05 higher, it outperformed the S& 500. Note that the key difference between the Sharpe and Treynor measures is that the Sharpe ratio measures return per unit of total risk, while Treynor measures return per unit of systematic risk.

 

likaiba

 

10、An analyst has gathered the following information about the performance of an equity fund and the S& 500 index over the same time period.  

                                                               Equity Fund                 S& 500

               Return                                            13%                          10.5%              

               Standard Deviation                           22%                          20%

               Beta                                             1.21                          1.00

               Risk-free rate is 5.25%

The Treynor measure for the equity fund is:

A)    0.064.

B)    0.570.

C)   0.048.

D)   0.071.

likaiba

 

The correct answer is A

(0.13 – 0.0525)/1.21 = 0.064.