Question 1

The Capital Market Line (CML)relates:
A)expected return to beta.
B)the risk-free rate to the market portfolio's rate of return.
C)risk to beta.
D)expected return to standard deviation.

Accepted Answer

The Capital Market Line (CML) relates the expected return of a portfolio to its standard deviation, representing the risk-return trade-off for efficient portfolios.

Question 2

The expected return of the market portfolio is 14% with a standard deviation of 25%.The risk-free rate is 6%.What is the weight of the market portfolio in an efficient portfolio with a standard deviation of 30%?
A)1.20
B)0.83
C)0.20
D)0.17

Accepted Answer

The answer of The expected return of the market portfolio...

Question 3

Greg has $10,000 to invest in a risk-free asset and in the market portfolio.The risk-free rate is 4.8%.The market portfolio has an expected return of 13.6% with a standard deviation of 15%.What are the expected return and standard deviation for a portfolio with 30% of the funds invested in the risk-free asset?
A)Expected return = 10.50%; standard deviation = 10.96%
B)Expected return = 10.96%; standard deviation = 10.50%
C)Expected return = 4.50%; standard deviation = 7.44%
D)Expected return = 7.44%; standard deviation = 4.50%

Accepted Answer

The expected return of the portfolio can be calculated using the formula: E(Rp) = w_rf * R_rf + w_m * E(R_m), where w_rf is the weight of the risk-free asset, R_rf is the risk-free rate, w_m is the weight of the market portfolio, and E(R_m) is the expected return of the market portfolio. With 30% in the risk-free asset, the expected return is: E(Rp) = 0.3 * 4.8% + 0.7 * 13.6% = 10.96%. The standard deviation of the portfolio is only affected by the market portfolio portion, so it's 0.7 * 15% = 10.5%.

Question 4

The risk-free rate is 5.25%.The expected return on the market is 12% with a standard deviation of 18%.What is the standard deviation of an efficient portfolio with a 16% expected return?
A)7.33%
B)10.12%
C)19.11%
D)28.67%

Accepted Answer

The standard deviation of an efficient portfolio can be calculated using the Capital Market Line (CML) formula. The formula is: σp = (Rp - Rf) / (Rm - Rf) * σm. Plugging in the values: σp = (16% - 5.25%) / (12% - 5.25%) * 18% = 28.67%.

Question 5

The expected return of a portfolio on the Capital Market Line (CML)is 14% with a standard deviation of 25%.The risk-free rate is 6%.What is the expected return on an efficient portfolio with a standard deviation of 30%?
A)9.6%
B)15.6%
C)22.8%
D)16.8%

Accepted Answer

The Capital Market Line (CML) equation is given by: $E(R_p) = R_f + \frac{E(R_m) - R_f}{\sigma_m} \times \sigma_p$, where $E(R_p)$ is the expected return on the portfolio, $R_f$ is the risk-free rate, $E(R_m)$ is the expected return on the market portfolio, $\sigma_m$ is the standard deviation of the market portfolio, and $\sigma_p$ is the standard deviation of the portfolio. Given $E(R_p) = 14\%$, $R_f = 6\%$, and $\sigma_m = 25\%$, for a portfolio with $\sigma_p = 30\%$, we find the expected return by substituting the given values into the equation. The slope of the CML is $\frac{14\% - 6\%}{25\%} = \frac{8\%}{25\%} = 0.32$. Therefore, the expected return on the portfolio with a standard deviation of 30% is $6\% + 0.32 \times 30\% = 6\% + 9.6\% = 15.6\%$.

Question 6

By combining the risk-free asset and the efficient frontier, the _____________ will be created.
A)capital market line
B)efficient frontier
C)security market line
D)attainable set

Accepted Answer

By combining the risk-free asset and the efficient frontier, we can create a new line called the capital market line which represents the optimal portfolios that maximize the expected return for a given level of risk. The capital market line is a straight line that intersects with the y-axis at the risk-free rate and passes through the market portfolio, which is the point on the efficient frontier with the highest Sharpe ratio. Thus, the correct answer is choice A.

Question 7

Which of the following is a FALSE statement about the Sharpe ratio?
A)It is used to assess the performance of portfolios.
B)It describes how well an asset's return compensates investors for the risk taken.
C)It is the slope of the CML when the portfolio is not the market portfolio.
D)It is a "risk-adjusted" measure of portfolio performance.

Accepted Answer

The Sharpe ratio is the slope of the Capital Market Line (CML), which reflects the tradeoff between risk and return for the market portfolio. When the portfolio is not the market portfolio, the slope is measured by the Treynor ratio or Jensen's alpha. Therefore, statement C is false.

Question 8

What is the expected return on an efficient portfolio with a standard deviation of 15%? Assume the risk-free rate is 6% and the expected return on the market portfolio is 14.8% with a standard deviation of 20%.
A)8.20%
B)12.60%
C)16.50%
D)17.73%

Accepted Answer

The expected return on an efficient portfolio can be calculated using the Capital Asset Pricing Model (CAPM) formula: Expected Return = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate). However, without the beta, we use the concept of the Security Market Line (SML) which is derived from CAPM and represents expected return as a function of systematic risk (beta). Given the information, we can also approach this through the concept of the Sharpe ratio, which is a measure for calculating risk-adjusted return. It is the ratio of the difference between the return of the investment and the risk-free rate, divided by the standard deviation of the investment. The Sharpe ratio of the market can be calculated as (Market Return - Risk-Free Rate) / Market Standard Deviation = (14.8% - 6%) / 20% = 0.44. Assuming the portfolio is efficient, it should have the same Sharpe ratio as the market. Thus, we can find the expected return of the portfolio by rearranging the Sharpe ratio formula: Expected Return = Risk-Free Rate + (Portfolio Standard Deviation * Sharpe Ratio of the Market) = 6% + (15% * 0.44) = 6% + 6.6% = 12.6%.

Question 9

What is the standard deviation of an efficient portfolio with an 8% expected return? Assume the risk-free rate is 3.75% and the expected return on the market portfolio is 10% with a standard deviation of 20%.
A)2.62%
B)6.40%
C)6.80%
D)13.60%

Accepted Answer

The answer of What is the standard deviation of an...

Question 10

The Capital Asset Pricing Model (CAPM)relates:
A)expected return to beta.
B)expected return to risk.
C)expected risk to beta.
D)expected return to standard deviation.

Accepted Answer

The answer of The Capital Asset Pricing Model (CAPM)relates:
A)expected return...

Question 11

Use the following three statements to answer this question:
I.The Capital Market Line (CML)must always be upward sloping, and it predicts required returns.
II.The Capital Market Line (CML)is based on expected rates of return, so it is ex post.
III.The Capital Market Line (CML)slope is the Sharpe ratio.
A)I, II, and III are correct.
B)I, II, and III are incorrect.
C)I and III are correct and II is incorrect.
D)I is incorrect, II and III are correct.

Accepted Answer

I. The CML is indeed upward sloping, reflecting that higher expected returns are associated with higher levels of risk.II. The CML is based on expected (ex ante) rates of return, not past (ex post) rates, making this statement incorrect.III. The slope of the CML is indeed the Sharpe ratio, which measures the additional return per unit of risk.

Question 12

An efficient portfolio has a 18% expected return.If the expected market return is 11% (with a standard deviation of 18%), and the risk-free rate is 5.5%, what is the standard deviation of the portfolio?
A)9.33%
B)11.12%
C)19.37%
D)40.91%

Accepted Answer

The answer of An efficient portfolio has a 18% expected...

Question 13

Which of the following is NOT an implication resulting from the assumption that capital markets are in equilibrium?
A)All assets are assumed to be bought and sold at the equilibrium price established by supply and demand.
B)All assets are not correctly priced to adequately compensate investors for the associated risks.
C)The price for an overpriced asset would eventually fall to an equilibrium level so that the asset is held by all investors.
D)The market portfolio will be the most efficient portfolio, with respect to the weights attached to the individual securities composing it.

Accepted Answer

The assumption of equilibrium does not necessarily imply that all assets are correctly priced to adequately compensate investors for the associated risks. In fact, some assets may be mispriced, resulting in potential opportunities for profitable trades by investors who recognize the mispricing.

Question 14

You are considering investing in one of three investments - A, B or C.When plotted against the CML, Investment A is below the CML line, Investment B is above the CML line and Investment C is right on the CML line.Which of the following statements is then true?
A)Investment A is the best investment because it will be underpriced in the market because it has a higher level of risk than the other investments
B)Investment B is the best investment because it is underpriced since the expected rate of return is less than the required rate of return
C)Investment C has identical expected and required rates of return so this investment is the most fairly priced
D)The question cannot be answered with the information given

Accepted Answer

Investment C is the most fairly priced because it has identical expected and required rates of return. The fact that Investment A is below the CML line indicates that it has a lower expected rate of return than what is required based on its level of risk. Investment B being above the CML line means it has a higher expected rate of return than what is required based on its level of risk. Therefore, neither of these investments is underpriced or a better choice than Investment C.

Question 15

What does the capital market line represent?
A)The highest attainable expected return for any given risk level that includes only efficient portfolios.
B)The frontier of efficient portfolios of risky assets.
C)The best return portfolio.
D)The lowest variance portfolios.

Accepted Answer

The capital market line is the line that represents the highest attainable expected return for any given risk level that includes only efficient portfolios. It is used to determine the optimal portfolio that balances risk and return based on an investor's risk tolerance.

Question 16

Which of the following is a FALSE statement of the market price of risk?
A)It is the incremental risk divided by the incremental expected return.
B)It is the slope of the capital market line.
C)It is the equilibrium price of risk in the capital market.
D)It indicates the additional expected return that the market demands for an increase in a portfolio's risk.

Accepted Answer

The market price of risk is the incremental expected return divided by the incremental risk, not the other way around, as stated in option A.

Question 17

The CAPM Model makes the following assumptions below EXCEPT:
A)Assumes there are no transactional costs.
B)Assumes there are no personal income taxes.
C)Assumes that all investors have different expectations about expected returns, and standard deviations for all traded securities.
D)Assumes that all investors can borrow/lend at the risk-free rate.

Accepted Answer

The CAPM Model assumes that all investors have the same expectations about expected returns and standard deviations for all traded securities. This is known as the assumption of homogeneous expectations. The other three assumptions are correct. The CAPM Model assumes no transactional costs (A), no personal income taxes (B), and that all investors can borrow/lend at the risk-free rate (D).

Question 18

The expected return of the market portfolio is 14% with a standard deviation of 25%.The risk-free rate is 6%.What would be the weight of the market portfolio in an efficient portfolio with a standard deviation of 30%, if borrowing is not allowed?
A)16.78%
B)83.33%
C)20%
D)Cannot be constructed

Accepted Answer

The answer of The expected return of the market portfolio...

Question 19

When applying the Sharpe ratio to assess portfolio management, which of the following statements is NOT true?
A)The higher the Sharpe ratio value then the risk-adjusted return is more favourable
B)The higher the Sharpe ratio value then the risk-adjusted return is less favourable
C)The lower the Sharpe ratio value then the risk-adjusted return is more favourable
D)The Sharpe ratio cannot be used to determine the performance of a portfolio

Accepted Answer

The answer of When applying the Sharpe ratio to assess...

Question 20

The expected return on the market is 12.5% with a standard deviation of 25%.The risk-free rate is 5.5%.What is the expected return on an efficient portfolio with a standard deviation of 30%?
A)4.10%
B)11.33%
C)13.90%
D)28.90%

Accepted Answer

The expected return on an efficient portfolio can be calculated using the Capital Asset Pricing Model (CAPM) formula: Expected Return = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate). However, without the beta of the portfolio, we use the concept of the Sharpe ratio, which is the return per unit of risk above the risk-free rate. Assuming the market portfolio is efficient, its Sharpe ratio would be (12.5% - 5.5%) / 25% = 0.28. Applying the same Sharpe ratio to the portfolio in question, the excess return over the risk-free rate would be 0.28 * 30% = 8.4%. Adding the risk-free rate back, the expected return is 5.5% + 8.4% = 13.9%.

Quiz 9: The Capital Asset Pricing Model Capm

The Capital Market Line (CML) relates:

The expected return of the market portfolio is 14% with a standard deviation of 25%.The risk-free rate is 6%.What is the weight of the market portfolio in an efficient portfolio with a standard deviation of 30%?

The risk-free rate is 5.25%.The expected return on the market is 12% with a standard deviation of 18%.What is the standard deviation of an efficient portfolio with a 16% expected return?

The expected return of a portfolio on the Capital Market Line (CML) is 14% with a standard deviation of 25%.The risk-free rate is 6%.What is the expected return on an efficient portfolio with a standard deviation of 30%?

By combining the risk-free asset and the efficient frontier, the _____________ will be created.

Which of the following is a FALSE statement about the Sharpe ratio?

What is the expected return on an efficient portfolio with a standard deviation of 15%? Assume the risk-free rate is 6% and the expected return on the market portfolio is 14.8% with a standard deviation of 20%.

What is the standard deviation of an efficient portfolio with an 8% expected return? Assume the risk-free rate is 3.75% and the expected return on the market portfolio is 10% with a standard deviation of 20%.

The Capital Asset Pricing Model (CAPM) relates:

An efficient portfolio has a 18% expected return.If the expected market return is 11% (with a standard deviation of 18%) , and the risk-free rate is 5.5%, what is the standard deviation of the portfolio?

Which of the following is NOT an implication resulting from the assumption that capital markets are in equilibrium?

You are considering investing in one of three investments - A, B or C.When plotted against the CML, Investment A is below the CML line, Investment B is above the CML line and Investment C is right on the CML line.Which of the following statements is then true?

What does the capital market line represent?

Which of the following is a FALSE statement of the market price of risk?

The CAPM Model makes the following assumptions below EXCEPT:

The expected return of the market portfolio is 14% with a standard deviation of 25%.The risk-free rate is 6%.What would be the weight of the market portfolio in an efficient portfolio with a standard deviation of 30%, if borrowing is not allowed?

When applying the Sharpe ratio to assess portfolio management, which of the following statements is NOT true?

The expected return on the market is 12.5% with a standard deviation of 25%.The risk-free rate is 5.5%.What is the expected return on an efficient portfolio with a standard deviation of 30%?