Investment Jobs Portfolio Analysis Test 1 — Questions and Answers
Question 1: Which portfolio performance metric measures return per unit of total risk (standard deviation)?
- Treynor ratio
- Jensen's alpha
- Sharpe ratio (Correct answer)
- Information ratio
Correct answer: Sharpe ratio
The Sharpe ratio divides excess return (return minus risk-free rate) by the portfolio's standard deviation to measure return per unit of total risk.
Question 2: Beta in portfolio analysis measures a security's sensitivity relative to what?
- The risk-free rate
- The market portfolio (Correct answer)
- The portfolio's own historical volatility
- Inflation
Correct answer: The market portfolio
Beta measures the degree to which a security's returns move in relation to the overall market (typically represented by an index like the S&P 500).
Question 3: What does a negative alpha indicate about a portfolio manager's performance?
- The portfolio outperformed its benchmark on a risk-adjusted basis
- The portfolio underperformed its benchmark on a risk-adjusted basis (Correct answer)
- The portfolio has negative correlation with the market
- The portfolio's volatility exceeds the benchmark
Correct answer: The portfolio underperformed its benchmark on a risk-adjusted basis
A negative alpha means the portfolio earned less return than predicted by its level of risk relative to the benchmark, indicating underperformance.
Question 4: Which correlation coefficient value indicates perfect negative correlation between two assets?
- 0
- +1
- -1 (Correct answer)
- 0.5
Correct answer: -1
A correlation coefficient of -1 indicates that two assets move in exactly opposite directions, providing maximum diversification benefit.
Question 5: The efficient frontier in Modern Portfolio Theory represents portfolios that offer:
- The highest possible return regardless of risk
- Maximum return for a given level of risk (Correct answer)
- Zero systematic risk
- 100% diversification
Correct answer: Maximum return for a given level of risk
The efficient frontier plots portfolios that achieve the maximum expected return for each level of risk (standard deviation), representing the optimal risk-return tradeoff.
Question 6: What is 'tracking error' in the context of portfolio management?
- The difference between a portfolio's return and its benchmark return
- The standard deviation of the difference between portfolio and benchmark returns (Correct answer)
- A clerical error in trade execution
- The cost of rebalancing a portfolio
Correct answer: The standard deviation of the difference between portfolio and benchmark returns
Tracking error is the standard deviation of the difference (active return) between a portfolio's returns and its benchmark's returns over time.
Investment Jobs Portfolio Analysis Test 1
Which portfolio performance metric measures return per unit of total risk (standard deviation)?