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Exam 20: Taxes, Inflation, and Investment Strategy

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Question 1

Multiple Choice

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If someone flips a fair coin to predict bear versus bull markets,they will most likely predict 50% of bull markets and 50% of bear markets correctly over time.Their market timing score is

A) 1.00
B) 0.75
C) 0.50
D) 0.25
E) 0.0

F) A) and B)
G) D) and E)

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Question 2

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The geometric average rate of return is based on

A) the market's volatility.
B) the concept of expected return.
C) the standard deviation of returns.
D) the CAPM
E) the principle of compounding.

F) A) and E)
G) B) and C)

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Question 3

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Suppose you purchase one share of the stock of Volatile Engineering Corporation at the beginning of year 1 for $36.At the end of year 1,you receive a $2 dividend,and buy one more share for $30.At the end of year 2,you receive total dividends of $4 (i.e. ,$2 for each share) ,and sell the shares for $36.45 each.The time-weighted return on your investment is _________.

An imperfect forecaster correctly predicts 57% of all bull markets and 63% of all bear markets.If the imperfect forecaster is able to charge a fee of $75,000,the fee that a perfect forecaster should charge is _________.

Suppose you buy 100 shares of Abolishing Dividend Corporation at the beginning of year 1 for $80.Abolishing Dividend Corporation pays no dividends.The stock price at the end of year 1 is $100,the price $120 at the end of year 2,and the price is $150 at the end of year 3.The stock price declines to $100 at the end of year 4,and you sell your 100 shares.For the four years,your geometric average return is

You want to evaluate three mutual funds using the Sharpe measure for performance evaluation.The risk-free return during the sample period is 6%.The average returns,standard deviations and betas for the three funds are given below,as is the data for the S&P 500 index. $\begin{array}{l}\begin{array} { l l l l } \text { Average Return } & \text { Standard Deviation }&\text { Beta } \\\text { Fund A } &24 \% & 30 \% & 1.5\\\text { Fund B } &12\%&10\%&0.5\\\text { Fund C } &22\%&20\%&1.0\\\text { S\&P 500 } &18\% &16\% &1.0\end{array}\end{array}$ The fund with the highest Sharpe measure is _________.

The money management industry uses dollar-weighted returns __________ for performance evaluation.

Suppose the risk-free return is 6%.The beta of a managed portfolio is 1.5,the alpha is 3%,and the average return is 18%.Based on Jensen's measure of portfolio performance,you would calculate the return on the market portfolio as

For a perfect market timer the rate of return is

Suppose you purchase one share of the stock of Volatile Engineering Corporation at the beginning of year 1 for $36.At the end of year 1,you receive a $2 dividend,and buy one more share for $30.At the end of year 2,you receive total dividends of $4 (i.e. ,$2 for each share) ,and sell the shares for $36.45 each.The dollar-weighted return on your investment is _________.

Portfolio managers A and B each manage $1,000,000 funds.Portfolio manager A has perfect foresight and the call option value of his perfect foresight is $180,000.Portfolio manager B is an imperfect forecaster and correctly predicts 60% of all bull markets and 70% of all bear markets.The value of portfolio manager B's imperfect forecasting ability is _________.

Studies of style analysis have found that ________ of fund returns can be explained by asset allocation alone.

Calculate Jensen's measure of performance for Beech Lake Discord Group.

Consider these two investment strategies: $\begin{array} { l c c } & \text { Strategy 1 } ( \% ) & \text { Strategy 2 } ( \% ) \\\hline \text { Expected return } & 6 & 9 \\\text { Standard deviation } & 0 & 4 \\\text { Highest return } & 6 & 15 \\\text { Lowest return } & 6 & 6\end{array}$ Strategy ___ is the dominant strategy because _________.

Discuss,in general,the performance attribution procedures.

An active portfolio manager faces a tradeoff between I.using the Sharpe measure. II.using mean-variance analysis. III.exploiting perceived security mispricings. IV.holding too much of the risk-free asset. V.letting a few stocks dominate the portfolio.

Most professionally managed equity funds generally _________.

You want to evaluate three mutual funds using the Treynor measure for performance evaluation.The risk-free return during the sample period is 6%.The average returns,standard deviations,and betas for the three funds are given below,in addition to information regarding the S&P 500 index. $\begin{array}{l}\begin{array} { l l l l } \text { Average Return } & \text { Standard Deviation }&\text { Beta } \\\text { Fund A } &13 \% & 10 \% & 0.5\\\text { Fund B } &19\%&20\%&1.0\\\text { Fund C } &25\%&30\%&1.5\\\text { S\&P 500 } &18\% &16\% &1.0\end{array}\end{array}$ The fund with the highest Treynor measure is _________.

Consider the Sharpe and Treynor performance measures.When a pension fund is large and has many managers,the __________ measure is better for evaluating individual managers while the __________ measure is better for evaluating the manager of a small fund with only one manager responsible for all investments.

Calculate Treynor's measure of performance for Beech Lake Discord Group.