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CA Final Modern Portfolio Theory — practice questions — page 3

Explore 73 free Modern Portfolio Theory questions in CA Final Strategicfinancialmanagement. Open each question or exercise to read its content, reference answers and available explanation.

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Modern Portfolio Theory questions and exercises with answers

Showing questions 61–73 of 73.

Which generalisation of the Sharpe ratio benchmarks against a risky index instead of a risk-free asset?Read the answer and worked solution →Sharpe's 1994 revision said the basis of comparison should beRead the answer and worked solution →Which measure scales excess return by total risk, covering both systematic and idiosyncratic risk?Read the answer and worked solution →A key weakness of the Sharpe ratio is that standard deviationRead the answer and worked solution →Which economist in 1952 suggested maximising (m - d) divided by sigma, where d is a disaster level?Read the answer and worked solution →The ex-post Sharpe ratio is computed usingRead the answer and worked solution →The Sharpe ratio can be manipulated when a fund holds illiquid assets because ofRead the answer and worked solution →Berkshire Hathaway's Sharpe ratio for 1976 to 2017 was reported asRead the answer and worked solution →The t-statistic of the Sharpe ratio equals the ratio times the square root ofRead the answer and worked solution →In CAPM, the beta used for pricing mainly capturesRead the answer and worked solution →Which statement best describes MPT's idea of diversification?Read the answer and worked solution →The risk-free rate is 6%, the market return 12% and a stock has expected return 10% with beta 0.5. Stock isRead the answer and worked solution →Investors who want higher expected returns in MPT must acceptRead the answer and worked solution →

Worked practice questions

Which generalisation of the Sharpe ratio benchmarks against a risky index instead of a risk-free asset?

  1. Current ratio
  2. Information ratio
  3. Acid-test ratio
  4. Payout ratio
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Correct answer: B. Information ratio

The information ratio uses another, typically risky, index as the benchmark.

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Sharpe's 1994 revision said the basis of comparison should be

  1. a fixed 5% hurdle
  2. last year's return
  3. an applicable benchmark
  4. the market beta value
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Correct answer: C. an applicable benchmark

The benchmark can change with time, so the ratio uses excess return over an appropriate benchmark.

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Which measure scales excess return by total risk, covering both systematic and idiosyncratic risk?

  1. Treynor ratio
  2. Beta coefficient
  3. Market risk premium
  4. Sharpe ratio value
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Correct answer: D. Sharpe ratio value

Treynor looks at systematic risk only, while Sharpe's standard deviation covers both kinds.

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