36 RELATE TO PERFORMANCE EVALUATION. WALKER AND NERO ARE...

Questions 31-36 relate to Performance Evaluation.

Walker and Nero are employees with Zimmer Advisors. Zimmer offers investment consulting

services to clients in North America. Walker and Nero's primary responsibility is evaluating

the performance of investment managers that Zimmer's clients are considering. Grunder

Preparatory School has retained Zimmer to advise the investment committee of its

endowment fund.

Grunder is considering adding private equity partnerships to the portfolio, but its investment

committee is unsure how it would monitor and measure these investments. In particular, they

aren't sure if using time-weighted or money-weighted rates of return when calculating

performance would be more appropriate and have asked Zimmer Advisors for advice.

Walker remarks that money-weighted rates of return are useful because they measures the

return of the assets and not client decisions to add or subtract funds.

Nero adds that time-weighted rates of return are easy to calculate and only require

beginning and end of total year market values.

Grunder has most of its portfolio in large-cap equities and the investment committee realizes

this investment strategy is extremely competitive so it asks Zimmer to evaluate its large-cap

manager compared to the manager's competitors. As a result, Walker and Nero benchmark

the performance of the school's large-cap equity manager against the median manager from

the manager's peer-group, using data provided by a popular investment consultant.

Grunder's investment committee then asks Walker and Nero to evaluate the performance of

the Knight and Elk funds. It also asks for advice regarding additional metrics that can be used

in evaluating manager performance. The most recent risk and return measures for Knight and

Elk are shown below. The T-bill return over the same time period was 3.0%. The return on

the S&P 500 was used as the market index.

Knight Elk Market Index

Return 6.80% 7.10% 6.60%

Beta 0.90 1.02 1.00

Standard deviation 32.6 34.2 31.0

...

What is the best description of Walker and Nero's comments about time-weighted and

money-weighted returns?

A) Both are correct.

B) Both are incorrect.

C) Only one is correct.

Question #32 of 60

Which of the following is most likely accurate about benchmarking against the median

manager in a universe?

A) It is not possible to identify the median manager.

B) The performance of the median manager is subject to upward bias.

C) The weights of individual securities required to replicate the median manager cannot be known.

Question #33 of 60

The Treynor ratio for the Knight fund is closest to:

A) 0.90.

B) 4.22.

C) 7.56.

Question #34 of 60

The Sharpe ratio for the Knight fund is closest to:

A) 0.21.

B) 0.12.

C) 0.90.

Question #35 of 60

The ex-post alpha for the Elk fund is closest to:

A) -0.06%

B) -0.01%.

C) 0.43%.

Question #36 of 60

Which performance measure would Walker and Nero choose if they want to consider the

impact of both market-related variability of returns and the variability of active management?

A) Sharpe ratio.

B) Treynor ratio.

C) Information ratio.

Question #37 of 60