Ideally clients would like to invest with the

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39. Ideally, clients would like to invest with the portfolio manager who has A. a moderate personal risk-aversion coefficient. B. a low personal risk-aversion coefficient. C. the highest Sharpe measure. D. the highest record of realized returns. E. the lowest record of standard deviations. The Sharpe measure is commonly used to measure the performance of professional managers. A good manager has a steeper CAL than the one from following a passive strategy. Difficulty: Easy 27-21
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Chapter 27 - The Theory of Active Portfolio Management 40. An active portfolio manager faces a tradeoff between I) using the Sharpe measure. II) using mean-variance analysis. III) exploiting perceived security mispricings. IV) holding too much of the risk-free asset. V) letting a few stocks dominate the portfolio. The active manager can use both the Sharpe measure and mean-variance analysis. The risk- free asset can be included as called for by market conditions. The active manager is seeking out mispricings and will want to exploit them. If there are a few very attractive securities the manager might have a concentration of these in the portfolio, which could lead to poor diversification. Difficulty: Difficult 41. To determine the optimal risky portfolio in the Treynor-Black Model, macroeconomic forecasts are used for the _________ and composite forecasts are used for the __________. The two factors combine to determine the optimal risky portfolio. Difficulty: Moderate 27-22
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Chapter 27 - The Theory of Active Portfolio Management 42. The beta of an active portfolio is 1.45. The standard deviation of the returns on the market index is 22%. The nonsystematic variance of the active portfolio is 3%. The standard deviation of the returns on the active portfolio is __________. s = [(1.45) 2 (0.22) 2 + 0.03] 1/2 = [0.13176] 1/2 = 36.3%. Difficulty: Difficult 43. Consider the Treynor-Black model. The alpha of an active portfolio is 1%. The expected return on the market index is 11%. The variance of return on the market portfolio is 6%. The nonsystematic variance of the active portfolio is 2%. The risk-free rate of return is 4%. The beta of the active portfolio is 1.1. The optimal proportion to invest in the active portfolio is __________. A. 45% B. 25% C. 50% D. 100% E. none of the above w O = [1%/2%]/[(11% - 4%)/6%] = .4286, or 42.86%; w* = .4286/[1 + (1 - 1.1).4286] = 0.4478. Difficulty: Difficult 27-23
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Chapter 27 - The Theory of Active Portfolio Management
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