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4、Which of the following statements regarding performance analysis are NOT correct?

I.           Information ratio (IR) is the ratio of risk to annual return.

II.         CAPM assumes the alpha (regression intercept) is positive.

III.        Significant t-statistic requires a smaller alpha (αP) relative to its standard deviation, as well as fewer observations.

IV.      Superior performance as shown by Sharpe ratio implies negative Jensen alpha.

A) I, II, and III only.

B) I, II, III, and IV.

C) I and II only.

D) I only.

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The correct answer is B

Information ratio is the ratio of annual return to risk. As per the CAPM model, alpha should be zero. Significant t statistic requires a higher alpha relative to its standard deviation and many observations. Superior performance, as per the Sharpe ratio, implies positive Jensen alpha. So, all statements are incorrect.

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5、During the last fifteen years, Norma, a portfolio manager, earned excess returns (over risk-free rate) of 16% with a standard deviation of 12%. During the same time period, excess returns (over risk-free rate) and standard deviation of a benchmark portfolio were 11% and 14% respectively. Norma claims to have beaten the benchmark portfolio at 95% confidence level. Based on our estimation:

I. we reject her claim.

II. we fail to reject her claim.

Which of the above statements is (are) CORRECT given that the t-statistic for the Sharpe ratio is 1.5?

A) I only.

B) II only.

C) Both I and II.

D) Neither I nor II.

likaiba

 

The correct answer is A

t = 1.5 < 2 (critical t at 95%), so we fail to reject the null hypothesis: H0: difference in Sharpe ratios is zero. Thus, we can reject her claim to have beaten the benchmark portfolio at 95% confidence level.

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6、Which of the following statements regarding performance analysis is NOT correct?

A) Return regression model assumes that the error terms are uncorrelated over time.

B) CAPM is based on a single factor, the market portfolio, which explains the variations in realized portfolio returns.

C) Performance of two portfolio managers cannot be compared based on estimates of IR (information ratio)—excess returns per unit of risk.

D) Sharpe ratio of an actively managed portfolio (statistically) significantly greater than the benchmark Sharpe ratio is taken as evidence of superior performance.

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The correct answer is C

A higher information ratio will indicate a better performance. Thus, the performance of two portfolio managers can be compared using information ratio.

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AIM 4: List and describe the effects various refinements to the basic return-based performance assessment models achieve.

1、Refinements to the basic return-based performance assessment models include:

I.           Bayesian correction.

II.         benchmark timing.

III.        a priori beta estimates.

IV.      correction for serial correlation.

A) I, II, and III only.

B) I, II, and IV only.

C) I, II, III, and IV.

D) I, III, and IV only.

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The correct answer is C

All of the above are refinements introduced to the basic return-based performance assessment models.

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2、Which of the following statements are CORRECT? Various refinements to the basic return-based performance assessment models include:

I.           using prior knowledge for making ex-post adjustments in regression coefficients.

II.         correcting for serially or auto correlated error terms to draw valid t-test inferences.

III.        assessing market timing skills of portfolio managers by incorporating up and down market betas into a dummy regression.

IV.      estimating variations in realized portfolio excess returns as a result of variations in the benchmark portfolio returns after controlling for dividend yield and interest rates.

A) II, III and IV.

B) I, II and III.

C) I and II.

D) I, II, III and IV.

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The correct answer is D

Statement I refers to Bayesian correction; statement II refers to correction for serial correlation; statement III refers to benchmark timing; and finally, the statement IV refers to controlling for public information.