Reading 47: Evaluating Portfolio Performance Los t~Q1-3

likely, errors, manager, control, management

LOS t: Contrast Type I and Type II errors in manager continuation decisions.

Q1. Suppose that all of a firm’s managers are outperforming the benchmark, some by a little, some by a lot. If the confidence intervals for a quality control charts in portfolio management were widened, what would the most likely effect be?

A) Type I error would become more likely and Type II error would become more likely.

B) Type I error would become more likely and Type II error would become less likely.

C) Type I error would become less likely and Type II error would become more likely.

Q2. Jack Jensen is the president of Jensen Management. Jensen prides himself on the care of his employees. He states that in 30 years of portfolio management, he has only had to fire two employees. Tom Mercer is president of Analytical Investors. His policy has been to replace poorly performing managers, where poor performance equals underperforming their benchmark for two successive quarters. Which of the following best describes these managers’ continuation decisions?

A) Jensen is likely committing Type II error and Mercer is likely committing Type I error.

B) Jensen is not likely to be committing any error and Mercer is likely committing Type II error.

C) Jensen is likely committing Type I error and Mercer is likely committing Type II error.

Q3. Which of the following is NOT a conclusion regarding quality control charts and how they are typically used to evaluate manager performance?

A) This is a two-tailed test.

B) H₀ will be that the manager adds no value; H_a is that the manager adds positive value.

C) Keeping a manager who generates no value added would be a Type I error.