Question 1

For the following three questions, assume that: $\bar { R } _ { m } = 15 \%$ , $\bar { R } _ { A } = 13 \%$ , $R _ { F } = 5 \%$ , $\sigma _ { m } = 16 \%$ , the market portfolio is a tangency portfolio, and that A is an efficient portfolio on the Capital Market Line.
-What would be the expected rate of return of portfolio A if its standard deviation was 32%?

Accepted Answer

The expected return of portfolio A can be calculated using the Capital Market Line (CML) formula: $ \bar{R}_A = R_F + \frac{\sigma_A}{\sigma_m} (\bar{R}_m - R_F) $. Substituting the given values: $ \bar{R}_A = 5\% + \frac{32\%}{16\%} (15\% - 5\%) = 25\% $.

Question 2

For the following three questions, assume that: $\bar { R } _ { m } = 15 \%$ , $\bar { R } _ { A } = 13 \%$ , $R _ { F } = 5 \%$ , $\sigma _ { m } = 16 \%$ , the market portfolio is a tangency portfolio, and that A is an efficient portfolio on the Capital Market Line.
-What is the standard deviation of portfolio A?

Accepted Answer

The standard deviation of portfolio A can be calculated using the Capital Market Line (CML) formula: $\sigma_A = \frac{\bar{R}_A - R_F}{\bar{R}_m - R_F} \times \sigma_m$. Substituting the given values: $\sigma_A = \frac{13\% - 5\%}{15\% - 5\%} \times 16\% = 12.8\%$.

Question 3

Security A has a greater level of systematic risk than security B.The expected equilibrium return for A must be greater than that for B because:

Accepted Answer

The Security Market Line (SML) concept from the Capital Asset Pricing Model (CAPM) suggests that the expected return on a security is directly related to its systematic risk (beta). If Security A has a greater level of systematic risk than Security B, it must offer a higher expected return to compensate investors for that higher risk. If it does not, investors will sell A (causing its price to fall) and buy B (causing its price to rise) until the expected returns are adjusted to match their levels of systematic risk, aligning with the principle that higher risk should be compensated with higher expected returns.

Question 4

In a CAPM framework,prohibiting short sales:

Accepted Answer

The answer of In a CAPM framework,prohibiting short sales:
...

Question 5

What is the expected return on asset A if it has a beta of 0.6,the expected market portfolio return is 15%,and the risk-free rate is 6%?

Accepted Answer

The expected return on asset A can be calculated using the Capital Asset Pricing Model (CAPM) formula: Expected Return = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate). Plugging in the values: Expected Return = 6% + 0.6 * (15% - 6%) = 6% + 0.6 * 9% = 6% + 5.4% = 11.4%.

Question 6

Which statement of the following statements is true?

Accepted Answer

The Security Market Line represents the expected return and risk of efficient portfolios, hence all portfolios that plot on the Security Market Line are efficient.

Question 7

Assume that the risk-free rate is 9% and that the market portfolio has an expected return of 17%.What expected return would be consistent with the CAPM for a security with a beta of 1.5?

Accepted Answer

According to the CAPM formula, the expected return on a security is equal to the risk-free rate plus the security's beta multiplied by the market risk premium (the difference between the expected return on the market portfolio and the risk-free rate).

So, using the given information:

Expected return = 9% + 1.5(17% - 9%)

Expected return = 9% + 1.5(8%)

Expected return = 9% + 12%

Expected return = 21%

Therefore, the expected return that would be consistent with the CAPM for a security with a beta of 1.5 is 21%. Choice B is the correct answer.

Question 8

The existence of riskless lending and borrowing at the same rate and homogeneous expectations means:

Accepted Answer

This scenario describes the assumptions of the Capital Asset Pricing Model (CAPM), where homogeneous expectations and the ability to lend and borrow at a risk-free rate lead to all investors holding the same portfolio of risky assets, known as the market portfolio.

Question 9

The standard CAPM implies:

Accepted Answer

The standard Capital Asset Pricing Model (CAPM) implies that investors are compensated for market risk, which is the risk that cannot be diversified away by holding a diversified portfolio. Therefore, choice B, "investors are compensated for all market risk they take," is the best choice. Choice A, "investors are compensated for all risk they take," is too broad and not accurate. Choice C, "portfolio diversification does not matter," is incorrect, as portfolio diversification is an essential tool to reduce unsystematic (company-specific) risk. Choice D, "high-return investments have higher variances than low-return investments," is a common misconception but not accurate, as the risk and return of an investment are not always directly related.

Question 10

Discuss whether the following statement is true or false:
Under the assumption of the standard CAPM,an investor who is very risk averse will only invest in the riskless asset and risky assets with very low variances.

Accepted Answer

Low-beta stocks are a result of low standard deviation,which means a low risk of non performance of an asset.Low risk of an asset gives lower returns on the asset due to the linear correlation between a security or portfolio's returns and Beta.Hence,an investor who wishes to minimize default risk and is ready to get lower returns on his portfolio,should predominantly buy low variance stocks.

Question 11

Which statement of the following statements is true?

Accepted Answer

The Security Market Line (SML) represents the expected return of securities as a function of their systematic risk, and in equilibrium, every security and combination of securities lies on the SML. The Capital Market Line (CML) is a line representing the risk-return tradeoff available to investors for efficient portfolios, so statement A and D are incorrect. Although the SML only includes efficient portfolios, this does not mean that only efficient portfolios lie on the SML, so statement C is also incorrect.

Question 12

In case of a simple CAPM being used to estimate a time series data:

Accepted Answer

The answer of In case of a simple CAPM being...

Question 13

Assume that the assumptions underlying the standard CAPM hold.Indicate whether each of the following statements is true or false.
a. A firm with a high variance will have a higher beta than a firm with a low variance.
b. A portfolio is efficient if it has no unsystematic risk.
c. A firm that is highly correlated with the market will have a higher beta than a firm that is less correlated.
d. If the variance of the market portfolio goes up, the betas of all securities will go down.
e. A well-managed firm will have a lower beta than a poorly managed firm.
f. The market portfolio is efficient. Therefore, it contains only the best stocks in the market.
 g. A risk-seeking investor should hold the riskiest stocks in the market, and a risk-averse investor should hold the safest stocks.
 h. If the riskless rate increases, the slope of the capital market line will decrease.

Accepted Answer

The answer of Assume that the assumptions underlying the standard...

Question 14

For the following three questions, assume that: $\bar { R } _ { m } = 15 \%$ , $\bar { R } _ { A } = 13 \%$ , $R _ { F } = 5 \%$ , $\sigma _ { m } = 16 \%$ , the market portfolio is a tangency portfolio, and that A is an efficient portfolio on the Capital Market Line.
-What would be the expected return and standard deviation of a portfolio with equal proportions invested in Treasury bills and the market portfolio?

Accepted Answer

The expected return of a portfolio with equal proportions invested in Treasury bills and the market portfolio is calculated as the average of the return on Treasury bills ($R_F = 5\%$) and the return on the market portfolio ($\bar{R}_m = 15\%$). Thus, the expected return is $(5\% + 15\%) / 2 = 10\%$. The standard deviation of a portfolio with equal proportions in Treasury bills (which have a standard deviation of 0% because they are risk-free) and the market portfolio ($\sigma_m = 16\%$) is half of the market portfolio's standard deviation, because only half of the portfolio is subject to market risk. Therefore, the standard deviation is $16\% / 2 = 8\%$.

Question 15

Discuss whether the following statement is true or false:
If there were no riskless assets in the economy,then there would be no security market line.

Accepted Answer

The security market line describes the expected return for all assets and portfolios in the economy.The expected return of an asset or a portfolio,whether efficient or not,can be determined. In a situation,where there is no lending or borrowing of riskfree securities,the security market line will still hold existence.Here,the straight line will be described by any two points.One convenient point is the market portfolio.A second convenient portfolio is where the straight line cuts the vertical axis (where Beta equals zero). 11ea83f1_e7f0_3ef1_b5a5_4b4bbfb48e5a_TB6527_00 The equation of the straight line will be 11ea83f1_e7f0_3ef2_b5a5_b3438c6ad530_TB6527_11 and will hold for a portfolio with zero Beta. 11ea83f1_e7f0_3ef3_b5a5_ddeeed49938d_TB6527_11 will be the expected return on this portfolio.Solving the equation further,we will get the final equation for the expected return on any security or portfolio as 11ea83f1_e7f0_3ef4_b5a5_f573fcb65f59_TB6527_11 .

Question 16

Assume that the risk-free rate is 9% and that the market portfolio has an expected return of 17%.Under equilibrium conditions as described by the CAPM,what would be the expected return for a portfolio having no diversifiable risk and a beta of 0.75?

Accepted Answer

The expected return can be calculated using the Capital Asset Pricing Model (CAPM) formula: Expected Return = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate). Plugging in the given values: Expected Return = 9% + 0.75 * (17% - 9%) = 9% + 0.75 * 8% = 9% + 6% = 15%.

Question 17

The CAPM implies that:

Accepted Answer

The Capital Asset Pricing Model (CAPM) suggests that investors may indeed invest in assets with expected returns lower than the riskless interest rate due to diversification benefits and individual risk preferences.

Question 18

The beta of an efficient portfolio:

Accepted Answer

The beta of an efficient portfolio is proportional to 1, depending on the proportion invested in the market portfolio. Beta measures a portfolio's volatility relative to the market; a beta of 1 means the portfolio moves exactly with the market. Efficient portfolios can have various betas depending on their market exposure, not necessarily 1, equal to their standard deviation, or always less than 1.

Question 19

A long-short investment strategy is used in the case where the target is being tracked vastly differs from a diversified market portfolio.In such a situation,a _____ model is being used.

Accepted Answer

A multi-index model is often used in a long-short investment strategy as it takes into account multiple benchmarks or indices instead of just one, which is the case with a single-index model. A multi-asset pricing model may also be used, but it focuses more on assessing the value of different asset classes within a portfolio rather than tracking performance relative to benchmarks. Value at risk, while important in risk management, does not directly relate to the specific modeling technique used in a long-short investment strategy.

Question 20

If the standard CAPM holds,a security with a high variance of return and a beta of zero should be expected to earn:

Accepted Answer

According to CAPM, the expected return of a security is equal to the risk-free rate plus a premium based on its beta. A security with a beta of zero has no systematic risk and therefore does not earn a premium above the risk-free rate. The high variance of return is irrelevant in this case. Therefore, the expected rate of return for this security would be the risk-free rate of return.

Quiz 3: Models of Equilibrium in the Capital Markets

Security A has a greater level of systematic risk than security B.The expected equilibrium return for A must be greater than that for B because:

In a CAPM framework,prohibiting short sales:

What is the expected return on asset A if it has a beta of 0.6,the expected market portfolio return is 15%,and the risk-free rate is 6%?

Which statement of the following statements is true?

Assume that the risk-free rate is 9% and that the market portfolio has an expected return of 17%.What expected return would be consistent with the CAPM for a security with a beta of 1.5?

The existence of riskless lending and borrowing at the same rate and homogeneous expectations means:

The standard CAPM implies:

Discuss whether the following statement is true or false: Under the assumption of the standard CAPM,an investor who is very risk averse will only invest in the riskless asset and risky assets with very low variances.

Which statement of the following statements is true?

In case of a simple CAPM being used to estimate a time series data:

Discuss whether the following statement is true or false: If there were no riskless assets in the economy,then there would be no security market line.

Assume that the risk-free rate is 9% and that the market portfolio has an expected return of 17%.Under equilibrium conditions as described by the CAPM,what would be the expected return for a portfolio having no diversifiable risk and a beta of 0.75?

The CAPM implies that:

The beta of an efficient portfolio:

A long-short investment strategy is used in the case where the target is being tracked vastly differs from a diversified market portfolio.In such a situation,a _____ model is being used.

If the standard CAPM holds,a security with a high variance of return and a beta of zero should be expected to earn: