Investment Performance Evaluation: Master the Art of Portfolio Assessment

Question 1

Which of the following is NOT a commonly used type of performance measure in investment evaluation?

Accepted Answer

Price-to-earnings ratio

Answer

Sharpe ratio

Answer

Jensen's alpha

Answer

Treynor ratio

Question 2

What is the key distinction between Jensen's alpha and Treynor ratio?

Accepted Answer

Jensen's alpha measures excess return over the benchmark, while Treynor ratio measures excess return per unit of risk

Answer

Treynor ratio measures excess return over the benchmark, while Jensen's alpha measures excess return per unit of risk

Answer

They are the same performance measure calculated using different methods

Answer

They are both measures of risk, not return

Question 3

Which of the following is NOT a type of performance measure commonly used in investment evaluation?

Accepted Answer

Return on Assets (ROA)

Answer

Sharpe Ratio

Answer

Treynor Ratio

Answer

Jensen's Alpha

Question 4

Explain the difference between ex-ante and ex-post performance evaluation in the context of investment analysis.

Accepted Answer

Ex-ante evaluation is conducted before an investment is made, using estimates and projections, while ex-post evaluation is conducted after the investment has been made, using actual data.

Answer

Ex-ante evaluation is more accurate than ex-post evaluation, as it is based on historical data.

Answer

Ex-post evaluation is more useful for decision-making, as it provides actual performance results.

Answer

Ex-ante and ex-post evaluation are essentially the same and serve the same purpose.

Question 5

Which of the following is an example of a risk-adjusted performance measure that considers both return and risk?

Accepted Answer

Sharpe Ratio

Answer

Rate of Return

Answer

Standard Deviation

Answer

Value at Risk (VaR)

Question 6

Which of the following is NOT a factor that can directly influence the performance of an investment portfolio?

Accepted Answer

Political stability of the investor's home country

Answer

Economic conditions

Answer

Investment horizon

Answer

Managerial skill

Question 7

Which of the following factors **does not** directly impact the performance of an investment portfolio?

Accepted Answer

Company management

Answer

Investment strategy

Answer

Economic conditions

Answer

Market sentiment

Question 8

What is the purpose of the Sharpe ratio?

Accepted Answer

To compare the performance of portfolios with varying levels of risk

Answer

To determine the excess return of a portfolio relative to a benchmark

Answer

To predict the future performance of a portfolio

Answer

To determine the optimal asset allocation for a portfolio

Question 9

What is the role of a benchmark in portfolio performance evaluation?

Accepted Answer

To compare the portfolio's performance against a relevant market index

Answer

To set a target return for the portfolio

Answer

To eliminate the need for calculating the portfolio's return

Answer

To predict the future performance of the portfolio

Question 10

What is the purpose of stress testing in investment performance evaluation?

Accepted Answer

To assess the potential downside risk of a portfolio under extreme market conditions

Answer

To identify opportunities to enhance portfolio returns

Answer

To eliminate the possibility of losses

Answer

To reduce the need for diversification

Question 11

Which of the following is NOT a common performance attribution technique?

Accepted Answer

Asset allocation modeling

Answer

Correlation analysis

Answer

Regression analysis

Answer

Factor analysis

Question 12

Why is it important to use a risk-adjusted performance measure?

Accepted Answer

It allows for a fair comparison of portfolios with different risk levels

Answer

It eliminates the need for diversification

Answer

It guarantees positive portfolio returns

Answer

It reduces the impact of market fluctuations

Question 13

Define correlation illusion and explain how it can influence the evaluation of investment portfolio performance.

Accepted Answer

Correlation illusion is a cognitive bias that leads individuals to overestimate the strength of the relationship between two variables when presented visually.

Answer

Correlation illusion has no impact on the assessment of investment portfolio performance.

Answer

Correlation illusion only occurs when the correlation between variables is positive.

Answer

Correlation illusion can be completely eliminated using statistical techniques like linear regression.

Question 14

Why is style analysis important in evaluating investment performance? Describe different approaches to conducting style analysis.

Accepted Answer

Style analysis helps investors understand a portfolio's risk and return profile, allowing them to assess its alignment with their investment goals.

Accepted Answer

Style analysis enables investors to compare the performance of similar portfolios, aiding in making informed investment decisions.

Answer

Style analysis is not relevant in investment performance evaluation, as it does not provide valuable insights into a portfolio's performance.

Answer

Style analysis is only used to identify underperforming investments, allowing investors to adjust their portfolios accordingly.

Question 15

Which performance measure is appropriate for assessing the performance of a fund manager who invests primarily in a portfolio of large-cap stocks?

Accepted Answer

Sharpe Ratio

Answer

R-squared

Answer

Treynor Ratio

Answer

Jensen's Alpha

Question 16

What is a key advantage of using a benchmark in investment performance evaluation?

Accepted Answer

Provides a standard for comparison

Answer

Guarantees investment success

Answer

Eliminates investment risk

Answer

Predicts future returns

Question 17

A portfolio manager consistently outperforms a broad market index, but the correlation between the manager's returns and the market is 0.95. What can this indicate about the manager's skill?

Accepted Answer

The manager may be taking excessive risk.

Answer

The manager is using a sophisticated investment strategy.

Answer

The manager has exceptional stock-picking ability.

Answer

The manager's performance is solely due to luck.

Question 18

Which of the following is a limitation of relying solely on historical data for evaluating investment performance?

Accepted Answer

It does not guarantee future performance

Answer

It provides a distorted view of past performance

Answer

It is biased towards more recent data

Answer

It can be difficult to obtain accurate historical data

Question 19

A portfolio manager generates consistently high returns with low volatility. However, the manager's strategy is proprietary and not clearly explained. What could be a concern?

Accepted Answer

Difficulty in replicating or verifying the strategy

Answer

Increased susceptibility to market risk

Answer

Potential for fraud or unethical practices

Answer

Higher transaction costs

Question 20

What is the objective of using a benchmark when assessing investment performance?

Accepted Answer

To compare the performance of an investment portfolio to a relevant market index

Answer

To identify specific investment opportunities

Answer

To determine the absolute return on an investment

Question 21

What is the fundamental goal of investment performance evaluation?

Accepted Answer

To facilitate informed investment decision-making

Answer

To track the daily performance of an investment portfolio

Answer

To identify potential investment opportunities

Question 22

Which method is used to calculate the dollar-weighted return of an investment portfolio?

Accepted Answer

Dividing the ending value of the portfolio by the initial value

Answer

Taking the geometric mean of the portfolio's annual returns

Answer

Dividing the change in portfolio value by the average portfolio value

Question 23

What is the function of the Sharpe ratio in investment performance evaluation?

Accepted Answer

Measures the excess return of an investment portfolio per unit of risk

Answer

Indicates the volatility of an investment portfolio relative to the market

Answer

Helps investors identify potential investment opportunities