Chapter 27
The Theory of Active Portfolio Management
Multiple Choice Questions
1. In the Treynor-Black model
A. portfolio weights are sensitive to large alpha values which can lead to infeasible long or
short positions for many portfolio managers.
B. portfolio weights are not sensitive to large alpha values which can lead to infeasible long or
short positions for many portfolio managers.
C. portfolio weights are sensitive to large alpha values which can lead to the optimal portfolio
for most portfolio managers.
D. portfolio weights are not sensitive to large alpha values which can lead to the optimal
portfolio for most portfolio managers.
E. None of these is true.
2. Absent research, you should assume the alpha of a stock is
A. zero.
B. positive.
C. negative.
D. not zero.
E. zero or positive.
3. If you begin with a ______ and obtain additional data from an experiment you can form a
______.
A. posterior distribution; prior distribution
B. prior distribution; posterior distribution
C. tight posterior; Bayesian analysis
D. tight prior; Bayesian analysis
E. None of these is true.
4. Benchmark risk is defined as
A. the return difference between the portfolio and the benchmark.
B. the standard deviation of the return of the benchmark portfolio.
C. the standard deviation of the return difference between the portfolio and the benchmark.
D. the standard deviation of the return of the actively-managed portfolio.
E. None of these is true.