Which of the following statements about the evaluation of portfolio performance is least accurate? A) In the decomposition of portfolio performance, a naive portfolio is constructed with its standard deviation set equal to the total risk of the manager’s portfolio that is being evaluated. B) The security market line (SML) represents an active investment strategy when Jensen’s Alpha is used as the measure for portfolio performance. C) When using the Sharpe ratio, the portfolio with the highest capital allocation line (CAL) slope is the best portfolio.
I’d say A.
A for me too. B sounds right as Jensen’s Alpha deals with beta and thus SML C seems ok too as Sharpe ratio deals with std deviation and thus the CML/CAL
B. SML represents an PASSIVE investment strategy But A is strange to me !
Keep em comin…will post the answer in a bit…btw…its from schweser…so I can understand the frustration…
I say B too. SML is market thus passive. Jensen Alpha is measuring the return over the line with the same risk. Not sure about A either.
My answer would be C. Higher sharpe ratio is better. The portfolio with the highest CAL slope (left side of the curve) would have a lower sharpe ratio and thus not be the best. B. Remember you’re creating the CML with Jensen’s alpha (measure of active return) as the y-axis. So, this would indicate active mgmt. A. Maybe because std dev is a measure of total risk, so this is correct? Systematic risk would be measured by beta.
Please note the least accurate answer is required !
Allright, here it is. Whoever chose B, you guys are gonna kill the exam! I forgot that SML is passive mgt. So, you use Jensen’s alpha or Treynor to indicate active mgt. relative to the market, right? Your answer: A was incorrect. The correct answer was B) The security market line (SML) represents an active investment strategy when Jensen’s Alpha is used as the measure for portfolio performance. The SML is a passive strategy in that the investor invests in a combination of the market portfolio and the risk free asset. Jensen’s Alpha measures the value added return due to active management I have no idea what A was and chose it instead. Anyone can decipher this?