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Multiple Choice Quiz (Pass Mark 4/7)
1. Which of the following are NOT measures of volatility?
MORE THAN ONE ANSWER IS CORRECT
A. Standard Deviation
B. Alpha
C. Beta
D. Sharpe Ratio
2. Which TWO of the following are used to calculate Beta?
MORE THAN ONE ANSWER IS CORRECT
A. Variance
B. Covariance
C. Alpha
D. Correlation Coefficient
3. Which of the following statements about MPT are CORRECT?
MORE THAN ONE ANSWER IS CORRECT
A. Both Alpha and the Sharpe Ratio are measures of risk-adjusted returns.
B. Alpha uses Standard Deviation as its measure of risk, whereas the Sharpe Ratio uses Beta.
C. Alpha is the difference between the expected return on the investment, and its actual return.
D. Negative Sharpe Ratios are unreliable and should not be used.
4. Which of the following statements about the Information Ratio (IR) are CORRECT?
MORE THAN ONE ANSWER IS CORRECT
A. The IR indicates the return on the investment, over the risk-free rate, for each unit of risk taken.
B. The IR is calculated as the difference between the expected return and the actual return.
C. The IR indicates the consistency of outperformance of the portfolio.
D. The IR is calculated with reference to the benchmark return and tracking error.
5. Which of the following statements about R Squared are correct?
MORE THAN ONE ANSWER IS CORRECT
A. A high R Squared indicates a more reliable beta.
B. A low R Squared may indicate that the benchmark might not be an appropriate barometer for comparison.
C. R Squared is calculated as the Standard Deviation squared.
D. An investment portfolio with a high R Squared and a low beta can be expected to have a positive alpha.
6. Which of the following may be reasons for retaining a portfolio?
MORE THAN ONE ANSWER IS CORRECT
A. Positive alpha.
B. Negative Sharpe Ratio.
C. Negative Information Ratio.
D. High Sharpe Ratio.
7. Which of the following may be reasons for switching a portfolio?
MORE THAN ONE ANSWER IS CORRECT
A. The current portfolio has a lower Information Ratio than the proposed portfolio.
B. The current portfolio has a lower alpha than the proposed portfolio.
C. The current portfolio has a higher Sharpe Ratio than the proposed portfolio.
D. The current portfolio has a low R Squared.
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Answers
1
1
1
B and D.
Standard deviation and beta are both measures of volatility. Alpha and the Sharpe Ratio are risk-adjusted returns.
2
1
1
A and B.
Beta is calculated as the covariance of the portfolio and benchmark returns divided by the variance of the benchmark.
Arguably the correlation coefficient can be used to calculate beta as it is used to calculate covariance, but this wasn't covere4d in the course... That said, if you selected D too, give yourself the mark.
3
1
3
A, C, and D.
Alpha and the Sharpe Ratio are both measures of risk-adjusted return. Alpha uses beta as its risk measure, and Sharpe uses the standard deviation. Alpha is the difference between the expected return on the investment, and its actual return. Negative Sharpe Ratios are unreliable and should not be used.
4
4
3
C and D.
The IR indicates the consistency of outperformance of the portfolio. It is calculated as the annualised return, less the benchmark return, divided by the tracking error. Answers A and B respectively describe the Sharpe Ratio and Alpha.
5
4
5
A, B, and D.
A high R Squared indicates a more reliable beta. A low R Squared may indicate that the benchmark might not be an appropriate barometer for comparison. R Squared is calculated as the correlation coefficient squared. An investment portfolio with a high R Squared and a low beta can be expected to have a positive alpha.
6
4
5
A and D.
A positive alpha and high Sharpe Ratio indicate risk-adjusted outperformance. Negative Sharpe Ratios are unreliable and should not be used. Negative Information Ratios indicate a consistency of nominal underperformance.
7
7
7
A and B
A higher IR on the proposed portfolio indicates a greater consistency of outperformance. A higher alpha on the proposed portfolio indicates a greater risk-adjusted return. A lower Sharpe Ratio on the proposed portfolio indicates a lower risk-adjusted return. R-Squared doesn't tell us anything about performance on its own - there are good funds with high and low R Squares and vice-versa.
If you answered D as well, because of the more reliable beta, give yourself the mark.