Bad5shah

ABC fund earned a total return of 19.5% for calendar year 2003. Its benchmark return during the same period of time is 17.50%. The risk-free rate of return for the period was 2.0%. ABC’s standard deviation is 16% and the standard deviation of the benchmark is 12%. Did the fund outperform its benchmark based on the Sharpe ratio?

A) No, the Sharpe ratio of the fund is 1.09 versus 1.29 for the benchmark.

B) No, the Sharpe ratio of the fund is 1.29 versus 1.09 for the benchmark.

C) Yes, the Sharpe ratio of the fund is 1.09 versus 1.29 for the benchmark.

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Sharpe Ratio for the fund = (19.5−2)/16 = 1.09 Sharpe Ratio for the benchmark = (17.5−2)/12 = 1.29

Bad5shah

Advanced quantitative models (AQM) global equity fund has averaged a return of 12.5% per year over the last 10 years. The benchmark average return over the same period was 11% per year. The risk-free rate of return during the same period averaged 3.50%. The standard deviation of the fund’s return is 16.15%, and the standard deviation of the surplus return is 10.50%.What is the Information Ratio for the fund?

A) 0.14.

B) 1.05.

C) 0.86.

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Information Ratio = (12.50−11)/10.5 = 0.14

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What is the Sharpe Ratio for the fund?

A) 1.19.

B) 0.14.

C) 0.56.

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Sharpe Ratio = (12.50−3.50)/16.15 = 0.56

Bad5shah

Sector risk is defined as the risk of:

A) individual countries in a passive benchmark portfolio.

B) all the sectors in the portfolio.

C) assigning the wrong weight to a sector in the portfolio.

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Sector risk is the risk of individual countries or sectors in a passive benchmark portfolio

Bad5shah

What is risk budgeting?

A) Identification of sources of portfolio risk.

B) Determination of a risk measure that the portfolio can take.

C) Determination of the amount of risk the portfolio can take.

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Risk budgeting is the risk counterpart of performance attribution. It identifies the sources of the portfolio risk.

Bad5shah

Selection risk is defined as the:

A) additional risk taken by deviating from the benchmark portfolio.

B) risk of individual companies in a sector in the benchmark portfolio.

C) risk of all the companies in a sector of the portfolio.

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Selection risk is the additional risk taken by deviating from the benchmark portfolio.

Bad5shah

For a global portfolio, the benchmark has to:

A) have the same amount of risk as the portfolio under consideration.

B) be consistent with the investment objective of the portfolio.

C) be custom defined by the manager of the portfolio.

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The benchmark should be consistent with the investment objective of the portfolio.

Bad5shah

For a global portfolio, why is a custom benchmark used?

A) A custom benchmark is more suitable for thinly traded international stocks.

B) Published indices are not comparable to the portfolio.

C) Since the custom benchmark is created by the manager, it is more likely to be accepted.

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Custom benchmarks are specified for a global portfolio because universally accepted indices may not be comparable to the portfolio.

Bad5shah

Which one of the following is NOT a consideration while forming a custom global benchmark?

A) A currency hedging component.

B) Specification of the risk measure to be used for performance evaluation.

C) Specification of the industry weights worldwide.

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Custom benchmarks involve a variety of considerations including a currency hedging component (if desired) and an industry weights component (bypassing the country weights).