Homework Answers
Q3) B) A portfolio of stock A and B provides better diversification than a portfolio of stock A and Z
Explanation : This is because thay have a negative correlation between them. This negative correlation suggests that they both move in opposite directions and hence will provide better diversification.
Q4) C) borrowing , investing
Explanation : In case of CML , any portfolio lying after market portfolio , borrows at risk free rate and invests in the risky assets.
Q5) B) less than market return
explanation : According to CAPM model
Expected return = Rf + Beta × ( Market return - Rf)
= 1.5% + (-1) ( 6% - 1.5%)
= 1.5% - 4.5%
= -3%
Q6) E) I, III
Explanation: Idiosyncratic risk is a risk which is diversifiable. Risk due inflation, change in interest rate, change in current are systematic risk and affects the whole economy , so they are not diversifiable.
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B. MICFUELUNUML U C. idiosyncratic risk CD. systematic risk 0.5. Which of thes A. II,IV B....
(a) Suppose that the CAPM holds. Consider stocks A, B, C and D plotted in the graph below together with portfolios X, T (the tangency or market portfolio), Z, and the risk-free asset S. No explanation...
(a) Suppose that the CAPM holds. Consider stocks A, B, C and D
plotted in the graph below together with portfolios X, T (the
tangency or market portfolio), Z, and the risk-free asset S. No
explanation necessary.
(i) If you could invest in the risk-free asset S and only one of
the stocks A, B, C or D, which stock would you choose?
(ii) Which of the stocks, A, B, C, or D, has the highest
beta?
(iii) Which of...
The investment universe consists of: a risk-free T-bill with annual yield of r = 3%; shares...
The investment universe consists of: a risk-free T-bill with
annual yield of r = 3%; shares of common stock of company 1, with
expected return of 1 = 9% and volatility of 1 = 16% shares of
common stock of company 2, with expected return of 2 = 14% and
volatility of 2 = 23%.
Portfolio selection and CAPM The investment universe consists of: . a risk-free T-bill with annual yield of r = 3%; . shares of common stock...
The investment universe consists of: a risk-free T-bill with annual yield of r = 3%; shares...
The investment universe consists of: a risk-free T-bill with
annual yield of r = 3%; shares of common stock of company 1, with
expected return of 1 = 9% and volatility of 1 = 16% shares of
common stock of company 2, with expected return of 2 = 14% and
volatility of 2 = 23%.
Portfolio selection and CAPM The investment universe consists of: . a risk-free T-bill with annual yield of r = 3%; . shares of common stock...
13. Beta is a measure of a stock's: Systematic Risk Risk relative to the market Both...
13. Beta is a measure of a stock's: Systematic Risk Risk relative to the market Both A and B None of the above The most volatile stock would have Beta. Higher than 1.0. Lower than 1.0. Very close to 0.0. Beta is not related to volatility. Discounted cash flow techniques used in valuing common stock are based on: future value analysis. present value analysis. The CAPM. the APT. c.
2. 3: Risk and Rates of Return: Risk in Portfolio Context Risk and Rates of Return:...
2. 3: Risk and Rates of Return: Risk in Portfolio Context Risk
and Rates of Return: Risk in Portfolio Context The capital asset
pricing model (CAPM) explains how risk should be considered when
stocks and other assets are held . The CAPM states that any stock's
required rate of return is the risk-free rate of return plus a risk
premium that reflects only the risk remaining diversification. Most
individuals hold stocks in portfolios. The risk of a stock held in...
(2*5) Consider a market with many risky assets and a risk-free security. Asset’s returns are not...
(2*5) Consider a market with many risky assets and a risk-free security. Asset’s returns are not perfectly correlated. All the CAPM assumptions hold and the market is in equilibrium. The risk-free rate is 5%, the expected return on the market is 15%. Mr. T and Mrs. R are two investors with mean-variance utility functions and different risk-aversion coefficients. They both invest into efficient portfolios composed of the market portfolio and the risk-free security. Mr. T’s portfolio has an expected return...
Which stock exchange is a “virtual exchange”? I. London stock exchange II. New York Stock...
Which stock exchange is a “virtual exchange”? I. London stock exchange II. New York Stock exchange III. Tokyo stock exchange IV. Over-the-counter market I and II only III and IV only I only IV only Kensington Company stock was selling at $132 a share when Charlotte sold 300 shares of the stock short. Today Charlotte bought 300 shares of the same stock at a price of $140 per share to cover her position. Ignoring trading costs, what...
1) A project has a market beta of 1.7. The risk-free rate is 3%, and the...
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There are three assets, A, B and C, where A is the market portfolio and C...
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29) Which of the following statements is FALSE? A) The Sharpe ratio of the portfolio tells us how much our expected...
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(a) Suppose that the CAPM holds. Consider stocks A, B, C and D
plotted in the graph below together with portfolios X, T (the
tangency or market portfolio), Z, and the risk-free asset S. No
explanation necessary.
(i) If you could invest in the risk-free asset S and only one of
the stocks A, B, C or D, which stock would you choose?
(ii) Which of the stocks, A, B, C, or D, has the highest
beta?
(iii) Which of...
The investment universe consists of: a risk-free T-bill with
annual yield of r = 3%; shares of common stock of company 1, with
expected return of 1 = 9% and volatility of 1 = 16% shares of
common stock of company 2, with expected return of 2 = 14% and
volatility of 2 = 23%.
Portfolio selection and CAPM The investment universe consists of: . a risk-free T-bill with annual yield of r = 3%; . shares of common stock...
The investment universe consists of: a risk-free T-bill with
annual yield of r = 3%; shares of common stock of company 1, with
expected return of 1 = 9% and volatility of 1 = 16% shares of
common stock of company 2, with expected return of 2 = 14% and
volatility of 2 = 23%.
Portfolio selection and CAPM The investment universe consists of: . a risk-free T-bill with annual yield of r = 3%; . shares of common stock...
13. Beta is a measure of a stock's: Systematic Risk Risk relative to the market Both A and B None of the above The most volatile stock would have Beta. Higher than 1.0. Lower than 1.0. Very close to 0.0. Beta is not related to volatility. Discounted cash flow techniques used in valuing common stock are based on: future value analysis. present value analysis. The CAPM. the APT. c.
2. 3: Risk and Rates of Return: Risk in Portfolio Context Risk
and Rates of Return: Risk in Portfolio Context The capital asset
pricing model (CAPM) explains how risk should be considered when
stocks and other assets are held . The CAPM states that any stock's
required rate of return is the risk-free rate of return plus a risk
premium that reflects only the risk remaining diversification. Most
individuals hold stocks in portfolios. The risk of a stock held in...
29) Which of the following statements is FALSE? A) The Sharpe ratio of the portfolio tells us how much our expected retun will increase for a given increase in volatility B) We should continue to trade securities until the expected r return of each security equals its required return. Q) The required return is the expected return that is necessary to compensate for the risk that an investment will contribute to the portfolio. D) If security is required retun exceeds...
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