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Multiple Choice Quiz
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1
The Black-Litterman model is geared toward ____________ while the Treynor-Black model is geared toward ____________.
A)security analysis; security analysis
B)asset allocation; asset allocation
C)security analysis; asset allocation
D)asset allocation; security analysis
E)none of the above
2
The Treynor-Black model is a model that shows how an investment manager can use security analysis and statistics to construct __________.
A)a market portfolio
B)a passive portfolio
C)an active portfolio
D)an index portfolio
E)a balanced portfolio
3
If you begin with a ______ and obtain additional data from an experiment you can form a ______.
A)posterior distribution; prior distribution
B)prior distribution; posterior distribution
C)tight posterior; Bayesian analysis
D)tight prior; Bayesian analysis
E)none of the above
4
The beta of an active portfolio is 1.20. The standard deviation of the returns on the market index is 20%. The nonsystematic variance of the active portfolio is 1%. The standard deviation of the returns on the active portfolio is __________.
A)3.84%
B)5.84%
C)19.60%
D)24.17%
E)26.0%
5
Consider the Treynor-Black model. The alpha of an active portfolio is 2%. The expected return on the market index is 16%. The variance of return on the market portfolio is 4%. The nonsystematic variance of the active portfolio is 1%. The risk-free rate of return is 8%. The beta of the active portfolio is 1. The optimal proportion to invest in the active portfolio is __________.
A)0%
B)25%
C)50%
D)100%
E)none of the above
6
According to the Treynor-Black model, the weight of a security in the active portfolio depends on the ratio of __________ to __________.
A)the degree of mispricing; the nonsystematic risk of the security
B)the degree of mispricing; the systematic risk of the security
C)the market sensitivity of the security; the nonsystematic risk of the security
D)the nonsystematic risk of the security; the systematic risk of the security
E)the total return on the security; the nonsystematic risk of the security
7
If a portfolio manager consistently obtains a high Sharpe measure, the manager's forecasting ability
A)is average.
B)is above average.
C)is below average.
D)does not exist.
E)cannot be determined based on the Sharpe measure.
8
The critical variable in the determination of the success of the active portfolio is
A)alpha/nonsystematic risk.
B)alpha/systematic risk.
C)gamma/nonsystematic risk.
D)gamma/systematic risk.
E)none of the above
9
Benchmark risk is defined as
A)the return difference between the portfolio and the benchmark.
B)the standard deviation of the return of the benchmark portfolio.
C)the standard deviation of the return difference between the portfolio and the benchmark.
D)the standard deviation of the return of the actively-managed portfolio.
E)none of the above
10
An active portfolio manager faces a tradeoff between
  1. using the Sharpe measure.
  2. holding too much of the risk-free asset.
  3. exploiting perceived security mispricings.
  4. using mean-variance analysis.
  5. letting a few stocks dominate the portfolio.
A)I and II
B)II and V
C)III and V
D)III and IV
E)II and III





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