Chapter 6: Q21_3B (page 711)
What type of investors would be interested in a target date retirement fund?Why?
Passive investors are interested in target date retirement fund because they are not actively involved in portfolio analysis.
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A clearly written investment policy statement is critical for:
a. Mutual funds.
b. Individuals.
c. Pension funds.
d. All investors.
Bill Smith is evaluating the performance of four large-cap equity portfolios: funds A, B, C,and D. As part of his analysis, Smith computed the Sharpe ratio and the Treynor measurefor all four funds. Based on his finding, the ranks assigned to the four funds are as follows:
The difference in rankings for funds A and D is most likely due to:
a. A lack of diversification in fund A as compared to fund D.
b. Different benchmarks used to evaluate each fund’s performance.
c. A difference in risk premiums.
Could portfolio A show a higher Sharpe ratio than that of B and at the same time a lower M2 measure? Explain.
For Questions 1–4, answer true or false. Explain your answer.
Question: Due to currency risk, dollar-denominated returns of international portfolios will have a higher standard deviation than local-currency-denominated returns.
Based on current dividend yields and expected capital gains, the expected rates of return on portfolios A and B are 11% and 14%, respectively. The beta of A is .8, while that of B is 1.5. The T-bill rate is currently 6%, while the expected rate of return of the S&P 500 index is 12%. The standard deviation of portfolio A is 10% annually, while that of B is 31%, and that of the index is 20%.
a. If you currently hold a market-index portfolio, would you choose to add either of these portfolios to your holdings? Explain.
b. If instead you could invest only in bills and one of these portfolios, which would you choose?
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