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. 3. You believe arbitrage price theory is a model for equity...
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3. You believe arbitrage price theory is a model for equity market returns. Your friend
tells you she has found an investment manager who has consistently produced
Jensen's alpha over the past ten years. You are skeptical because: A. She cannot tell you the investment manager's information ratio B. You believe this alpha is explained by unidentified risks within the manager '8
portfolio C. You suspect your friend has not included the risk free rate in her analysis D. Income taxes typically eliminate any alpha a manager may earn on a pre-tax basis 4. Which one of the following would not be considered to be a "fundamental" factor
associated with a smart beta product:
A. Volatility
B. Quality
C. Size
D. Investor Sentiment 5. Company J has returned 15% p.a. over the past five years, versus p.a. returns of 13%
and 6.5% for the equity market and Treasury Bills, respectively. You run a linear
regression and determine Company J 's stock exhibited a beta of 1.25 and
idiosyncratic variance of .004. The Jensen's alpha of Company J's stock during this
period was closest to: A. -l.26%
B. -.45%
C. 38% D. .79%
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6. Assume an equity market neutral portfolio (i.e., beta = 0) is constructed from a
combination of one part investors' "equity" contributions and five parts leverage.
This levered strategy produced a gross annual return of 13% before fees and interest
income, the stock lenders chargesd a fee of 1% pa. to loan stock, and cash sitting in
the portfolio earned 2% pa. If the strategy's idiosyncartic variance before leverage was .000144, the Sharpe ratio of the strategy on an unlevered basis was closet to:
A. 1.50 B. 1.39
C. 1.25
D. 1.20
Answer & Explanation
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