Investment Performance Evaluation: Measuring and Evaluating Investment Returns

Question 1

Which element is NOT part of the Capital Asset Pricing Model (CAPM) equation?

Accepted Answer

Systematic risk

Answer

Risk-free rate

Answer

Expected return

Answer

Market risk premium

Question 2

Which investment type is generally associated with high risk and potentially high returns?

Accepted Answer

Stocks

Answer

Bonds

Answer

Cash equivalents

Answer

Real estate

Question 3

Which of the following is a useful tool for tracking the historical performance of an investment?

Accepted Answer

Historical price chart

Answer

Analyst recommendation

Answer

Financial report

Answer

Investment prospectus

Question 4

Which investment risk stems from the potential loss of purchasing power due to inflation?

Accepted Answer

Purchasing power risk

Answer

Liquidity risk

Answer

Interest rate risk

Answer

Market risk

Question 5

Which measure of investment performance incorporates both return and risk?

Accepted Answer

Sharpe ratio

Answer

Alpha

Answer

Beta

Answer

Jensen's alpha

Question 6

Calculate the Sharpe ratio using the formula:

Accepted Answer

(Expected return - Risk-free rate) / Standard deviation

Answer

(Risk-free rate - Expected return) / Standard deviation

Answer

Standard deviation / (Expected return - Risk-free rate)

Answer

Standard deviation / (Risk-free rate - Expected return)

Question 7

Identify the type of risk that affects all investments in a market sector:

Accepted Answer

Systematic risk

Answer

Unsystematic risk

Answer

Company-specific risk

Answer

Political risk

Question 8

What is the primary goal of a performance attribution analysis?

Accepted Answer

Identify the sources of investment returns

Answer

Forecast future investment performance

Answer

Reduce investment costs

Answer

Maximize investment profits

Question 9

Which investment strategy involves actively making investment decisions based on market analysis?

Accepted Answer

Active investing

Answer

Passive investing

Answer

Value investing

Answer

Growth investing

Question 10

Diversifying an investment portfolio primarily aims to:

Accepted Answer

Reduce risk

Answer

Increase returns

Answer

Minimize taxes

Answer

Maximize liquidity

Question 11

Which stock characteristic typically includes large market capitalization and stability?

Accepted Answer

Blue-chip stock

Answer

Growth stock

Answer

Value stock

Answer

Penny stock

Question 12

The Capital Asset Pricing Model (CAPM) primarily describes the relationship between:

Accepted Answer

Risk and return

Answer

Expected return and investment horizon

Answer

Diversification and portfolio risk

Answer

Market volatility and investment strategy

Question 13

How does the consideration of tax avoidance strategies affect the ethical implications of evaluating investment performance?

Accepted Answer

It may create a conflict between maximizing investment returns and minimizing tax obligations.

Answer

It may lead to a more accurate assessment of investment performance.

Answer

It may have no impact on the ethical implications of evaluating investment performance.

Answer

It may enhance investor trust in investment managers.

Question 14

Which investment strategy is most appropriate for an investor with a high risk tolerance and a short-term investment horizon?

Accepted Answer

Growth strategy

Answer

Income strategy

Answer

Value strategy

Answer

Defensive strategy

Question 15

What is a key distinction between absolute return and relative return in investment performance evaluation?

Accepted Answer

Absolute return measures an investment's performance against a specific benchmark, while relative return compares it to other investments in a peer group or market index.

Answer

Absolute return measures total return, while relative return measures risk-adjusted return.

Question 16

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

Accepted Answer

Return on Shareholders' Equity (ROE)

Answer

Net Asset Value (NAV)

Answer

Internal Rate of Return (IRR)

Answer

Sharpe Ratio

Question 17

The Sharpe Ratio measures the:

Accepted Answer

Excess return per unit of risk

Answer

Total return compared to benchmark

Answer

Volatility of an investment

Answer

Average return over time

Question 18

Which of the following is a non-parametric statistical technique used in investment evaluation for analyzing correlation between variables?

Accepted Answer

Spearman's rank correlation

Answer

Monte Carlo simulation

Answer

Regression analysis

Answer

Technical analysis

Question 19

The Treynor ratio is calculated as the:

Accepted Answer

Excess return divided by the market risk premium

Answer

Total return divided by the benchmark return

Answer

Sharpe Ratio divided by the standard deviation

Question 20

Which method of performance evaluation involves comparing an investment's return to a pre-defined benchmark?

Accepted Answer

Index Model

Answer

Internal Rate of Return

Answer

Time-Weighted Return

Answer

Risk-Adjusted Performance Measures

Question 21

The Jensen Alpha measures the:

Accepted Answer

Excess return over the expected return based on a benchmark

Answer

Correlation between two investments

Answer

Total return minus inflation

Answer

Standard deviation of returns

Question 22

The Sharpe Ratio, a risk-adjusted performance measure, is calculated as:

Accepted Answer

Excess return divided by the standard deviation of returns

Answer

Total return divided by the benchmark return

Answer

Correlation coefficient

Answer

IRR minus Net Present Value (NPV)

Question 23

The Time-Weighted Return (TWR) calculation assumes that:

Accepted Answer

Cash flows are reinvested at the TWR

Answer

The investment is liquidated at the end of the period

Answer

Returns are compounded annually

Answer

The investment has a constant rate of return

Question 24

Which of the following is NOT a commonly used metric for evaluating investment performance?

Accepted Answer

Earnings per share

Answer

Beta

Answer

Sharpe ratio

Answer

Return on investment (ROI)

Question 25

An investment with a high Sharpe ratio suggests:

Accepted Answer

Favorable risk-adjusted return performance

Answer

Low volatility

Answer

Substantial absolute return

Answer

Little correlation to the broader market

Question 26

Diversification, as an investment strategy, involves:

Accepted Answer

Investing in a portfolio of stocks from various industries

Answer

Investing heavily in a single industry sector

Answer

Purchasing an individual stock with a high projected return

Question 27

The Treynor ratio serves to measure:

Accepted Answer

An investment's return relative to its systematic risk

Answer

An investment's return relative to its overall risk

Answer

An investment's volatility in relation to the market

Answer

An investment's beta

Question 28

The Jensen Alpha evaluates an investment's performance by comparing it to:

Accepted Answer

A benchmark portfolio

Answer

The return of a treasury bill

Answer

The average return of the entire stock market

Answer

The risk-free rate

Question 29

The formula for the Sharpe ratio involves dividing:

Accepted Answer

The excess return by the standard deviation of the portfolio

Answer

The total return by the standard deviation of the market

Answer

The standard deviation of the market by the total return

Question 30

Utilizing historical data in investment performance evaluation offers the benefit of:

Accepted Answer

Providing a record of past performance

Answer

Eliminating the need for risk analysis

Answer

Mitigating the effects of market volatility

Answer

Guaranteeing future investment performance

Question 31

Which measure calculates the average return of an investment over a given time period?

Accepted Answer

Arithmetic Mean Return

Answer

Standard Deviation

Answer

Sharpe Ratio

Question 32

What is the primary objective of risk analysis in investment performance evaluation?

Accepted Answer

To determine the level of uncertainty associated with an investment.

Answer

To forecast the future performance of the investment.

Answer

To maximize the investment's return.

Question 33

Which of the following is NOT a commonly used risk-return trade-off measure?

Accepted Answer

Jensen's Alpha

Answer

Sharpe Ratio

Answer

Sortino Ratio

Answer

Treynor Ratio

Question 34

What is the main purpose of calculating the beta coefficient?

Accepted Answer

To determine the systematic risk of an investment.

Answer

To assess the portfolio's diversification level.

Answer

To determine the expected return of an investment.

Question 35

What is the purpose of conducting regression analysis in investment performance evaluation?

Accepted Answer

To determine the relationship between an investment's returns and relevant market factors.

Answer

To forecast future investment returns.

Answer

To identify the optimal investment strategy.

Question 36

Which of the following is a limitation of using historical performance data in investment evaluation?

Accepted Answer

Past performance may not indicate future results.

Answer

Historical data can provide valuable insights.

Answer

Historical data is easily accessible.

Answer

Historical data is always accurate.

Question 37

What is the key difference between active and passive investment management strategies?

Accepted Answer

Active management strives to outperform the market, while passive management aims to track the market's performance.

Answer

Active management is always more profitable than passive management.

Answer

Passive management requires less expertise than active management.

Question 38

Which of the following factors is crucial when evaluating an actively managed portfolio?

Accepted Answer

The portfolio manager's skills and past performance.

Answer

Size of the portfolio

Answer

Current market conditions

Question 39

What is the primary purpose of performance attribution analysis?

Accepted Answer

To identify the sources of return and risk in an investment portfolio.

Answer

To determine the future performance of the investment.

Answer

To evaluate the portfolio manager's skill.

Question 40

Which of the following metrics is NOT commonly used to assess investment performance?

Accepted Answer

Market Capitalization

Answer

Sharpe Ratio

Answer

Return on Investment (ROI)

Question 41

The Sharpe Ratio is a measure of:

Accepted Answer

Risk-adjusted return

Answer

Absolute return

Answer

Correlation

Answer

Volatility

Question 42

Which of the following is a key input in the Capital Asset Pricing Model (CAPM)?

Accepted Answer

Beta

Answer

Sharpe Ratio

Answer

Alpha

Answer

Standard Deviation

Question 43

Which of the following is an advantage of using a performance benchmark?

Accepted Answer

Provides a standard for comparison

Answer

Guarantees positive returns

Answer

Eliminates the need for risk analysis

Question 44

Jensen's Alpha measures:

Accepted Answer

Excess return over the benchmark

Answer

Total return of an investment

Answer

Risk-free return

Answer

Volatility of the investment

Question 45

Which of the following is a qualitative factor considered in investment performance evaluation?

Accepted Answer

Managerial expertise

Answer

Beta

Answer

Sharpe Ratio

Answer

Return on Investment (ROI)

Question 46

The overarching goal of investment performance evaluation is to:

Accepted Answer

Inform decision-making

Answer

Fulfill regulatory requirements

Answer

Discipline underperforming fund managers

Answer

Provide historical data

Question 47

Which of the following performance measures is most appropriate for evaluating the performance of a portfolio over a long-term horizon, where the contributions and withdrawals are not taken into account?

Accepted Answer

Time-weighted rate of return (TWRR)

Answer

Dollar-weighted rate of return (DWRR)

Answer

Sharpe ratio

Answer

Treynor ratio

Question 48

A portfolio manager achieved a return of 15% while the benchmark index returned 10%. The portfolio's beta is 1.2. What is the portfolio's alpha?

Accepted Answer

2.5%

Answer

12.5%

Answer

10%

Answer

5%

Question 49

Which of the following is NOT a component used in the calculation of Jensen's alpha?

Accepted Answer

Standard deviation of the portfolio returns

Answer

Market return

Answer

Portfolio beta

Answer

Portfolio return

Question 50

Which of the following investment strategies is most likely to be employed by a passive investor who seeks to minimize transaction costs and tracking error?

Accepted Answer

Investing in a broad market index fund

Answer

Active portfolio management

Answer

Market timing

Answer

Security selection

Question 51

A mutual fund manager claims to have outperformed the market consistently for the past five years. Which of the following is the most likely explanation for this performance?

Accepted Answer

A combination of skill, luck, and survivorship bias

Answer

Pure luck

Answer

Inside information

Answer

Pure skill

Question 52

An investor is evaluating the performance of a hedge fund that has consistently generated high returns. What is a potential red flag that should raise concerns about the fund's sustainability?

Accepted Answer

High leverage

Answer

Low fees

Answer

Strong track record

Answer

Diversified portfolio

Question 53

What is the primary purpose of utilizing a benchmark in investment performance evaluation?

Accepted Answer

To compare the performance of an investment to an established standard or reference point

Answer

To minimize risk

Answer

To predict future returns

Answer

To identify investment opportunities

Question 54

A portfolio manager achieved a return of 12% while the benchmark index returned 10%. The portfolio's standard deviation is 8%, and the benchmark index's standard deviation is 6%. Which performance measure would be most appropriate to compare the portfolio's risk-adjusted performance to the benchmark?

Accepted Answer

Sharpe ratio

Answer

Treynor ratio

Answer

Information ratio

Answer

Jensen's alpha