Deck 5: Mean-Variance Analysis and the Capital Asset Pricing Model

Question 1

The beta of a risk-free asset:

A)is equal to zero.
B)is equal to -1.
C)is equal to 1.
D)can take any value greater than 0.

Answer 1

A

Question 2

Which of the following represents the capital market line (CML)? (R_T and $\sigma$ _T are the mean and standard deviation of the tangency portfolio's return,respectively. $\sigma$ _P is the standard deviation of the portfolio,and r_f is the return of the risk-free asset.)

A)
B)
C)
D)

Answer 2

Question 3

Which of the following is the correct CAPM equation used to determine the expected returns (r)of financial assets? (RM is the mean return of the market portfolio,r_f is the risk-free rate,and $\beta$ is the beta computed against the return of the market portfolio.)

A)r = $\beta$ (R_M - r_f)- r_f
B)r = r_f - $\beta$ (R_M - r_f)
C)r = r_f - $\beta$ (R_M + r_f)
D)r = r_f + $\beta$ (R_M - r_f)

Answer 3

r = r_f + $\beta$ (R_M - r_f)

Question 4

Which of the following can be considered as a risk-free asset in finding the efficient frontier?

A)Corporate bonds
B)Pension funds
C)Treasury bills
D)Mutual funds

Question 5

Which of the following is a reason for beta being considered as a relevant measure risk,instead of variance?

A)The marginal variance determines the incremental risk from adding a small amount of the investment to the portfolio.
B)The total variance determines the incremental risk from adding a small amount of the investment to the portfolio.
C)The total variance of the asset added determines the total risk of the portfolio.
D)The marginal risk of the portfolio is unaffected by the variance in the returns of the individual assets in the portfolio.

Question 6

Which of the following is a disadvantage of CAPM?

A)It assumes that investors are indifferent to risk and return.
B)It does not capture all the relevant risk factors in the economy.
C)It ignores systematic risk.
D)It assumes that no two securities have significant correlation.

Question 7

How are mean-variance analysis and the CAPM useful to corporations?

Question 8

Momentum is defined as:

A)the number of securities traded on a trading day.
B)the asset's return over a set previous period.
C)the ratio of a firm's market value to book value.
D)the market value of a firm's outstanding shares.

Question 9

Which of the following is an assumption of mean-variance analysis?

A)The securities have zero covariance.
B)There are no arbitrage opportunities.
C)The securities have either perfect positive or negative correlation.
D)Financial markets are frictionless.

Question 10

To identify the tangency portfolio:

A)we must find the portfolio that has a covariance with each asset that is a constant proportion of the asset's risk premium.
B)we must find the portfolio that has a covariance with each asset that is a constant proportion of the asset's mean variance.
C)we must find the portfolio that has a correlation with each asset that is a constant proportion of the asset's standard deviation.
D)we must find the portfolio that has a covariance with each asset that is a constant proportion of the risk free rate.

Question 11

A portfolio consists of three stocks with equal weightage.If the betas of the three stocks are 2.3,3.4 and 1.5.Find the portfolio's beta.

A)7.2
B)21.6
C)3.6
D)2.4

Question 12

The market portfolio is:

A)a portfolio where the weight on each asset is its market value divided by the market value of all risky assets.
B)a portfolio which is designed to match certain attributes of target portfolios in a given market.
C)a portfolio which includes all risky and risk-free assets in the market.
D)a unique optimal portfolio that gives the highest possible returns for the lowest risk in the market.

Question 13

What are the main assumptions of mean-variance analysis?

Question 14

Which of the following equations is used to estimate beta using regression analysis?

A)
B)
C)
D)

Question 15

Which of the following is an assumption of the CAPM?

A)Investors will be trying to outsmart one another.
B)Investors will actively manage their portfolios.
C)Investors will assume zero risk for all investments.
D)Investors have homogeneous beliefs.

Question 16

The efficient frontier represents:

A)the means and correlation of the mean-variance efficient portfolios.
B)the set of portfolios that gives the highest return at each level of risk.
C)the set of portfolios that involve no personal trade-off between mean and variance for investors.
D)the returns of individual equities that are not distributed normally.

Question 17

What is beta? Why is it that the beta and not the variance the relevant measure of risk?

Question 18

The beta of a stock or portfolio is the:

A)ratio of its covariance with the returns of the tangency portfolio to the market risk premium of the market portfolio.
B)ratio of its covariance with the returns of the tangency portfolio to the standard deviation of the tangency portfolio.
C)ratio of its covariance with the returns of the tangency portfolio to the variance of the tangency portfolio.
D)ratio of its correlation with the returns of the tangency portfolio to the standard deviation of the tangency portfolio.

Question 19

Explain the concept of efficient frontier.