Question 1

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

Accepted Answer

Weight in market portfolio,11ea8229_34c6_b8a2_bbd8_8b707392c413_TB1726_11,Weight in risk-free asset = 1 - 0.75 = 0.25
Portfolio expected return, 11ea8229_34c6_dfb3_bbd8_b56a56c1845e_TB1726_11

Question 2

Greg has $10,000 to invest in a risk-free asset and the market portfolio.The risk-free rate is 4.8 percent.The market portfolio has an expected return of 13.6 percent with a standard deviation of 15 percent.What are the expected return and standard deviation for a portfolio with 30 percent 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

Portfolio expected return,11ea8229_34c7_2dd4_bbd8_09be0cebb502_TB1726_11 Portfolio standard deviation,11ea8229_34c7_2dd5_bbd8_a9f4ee2d0fa2_TB1726_11

Question 3

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

If capital markets are in equilibrium, all assets are correctly priced to adequately compensate investors for the associated risks. Therefore, choice B is not an implication resulting from the assumption that capital markets are in equilibrium.

Question 4

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

Accepted Answer

Weight in market portfolio,11ea8229_34c6_6a80_bbd8_eb2b6d4e1344_TB1726_11 Weight in risk free asset = 1 - 0.68 = 0.32
Portfolio standard deviation, 11ea8229_34c6_6a81_bbd8_0d6e2b5e90ff_TB1726_11

Question 5

Suppose you have $5,000 to invest in a risk-free asset and the market portfolio.The expected return on the market portfolio is 13.5 percent with a standard deviation of 18 percent.The risk-free rate is 4.25 percent.How much of your funds should be in the risk-free asset if the portfolio has an expected return of 10 percent?
A) $1,892
B) $2,091
C) $2,909
D) $3,108

Accepted Answer

Weight in risk-free asset,11ea8229_34c8_3f4a_bbd8_619e5aa785bf_TB1726_11 Amount invested in risk-free asset = $5,000*0.3784 = $1,892

Question 6

The expected return on the market is 12 percent with a standard deviation of 20 percent.The risk-free rate is 4.5 percent.What is the Sharpe ratio of a portfolio with an expected return of 10.5 percent and a standard deviation of 12 percent?
A) 0.38
B) 0.50
C) 0.70
D) 0.88

Accepted Answer

11ea8229_34c7_7bf6_bbd8_cd136a10cca0_TB1726_11

Question 7

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

Weight in market portfolio,W = (0.18 - 0.055)/(0.11 - 0.055)= 2.2727
Weight in risk-free asset = 1 - 2.2727 = -1.2727
Portfolio standard deviation = 0.18 X 2.2727 = 0.4091 F1S1S1W1F1F1F10 40.91%

Question 8

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

Accepted Answer

Weight in market portfolio,11ea8229_34c5_ce3e_bbd8_bbce9d896333_TB1726_11,Weight in risk free asset = 1 - 1.20 = -0.20
Portfolio expected return, 11ea8229_34c5_f54f_bbd8_e5a8f3ef004c_TB1726_11

Question 9

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 additional expected return that the market demands for an increase in a portfolio's risk. Choice A states that it is the incremental risk divided by the incremental expected return, which is incorrect. This ratio is instead known as the Sharpe ratio.

Question 10

Which of the following is a NOT an assumption of the CAPM?
A) All investors have different expectations about expected returns, standard deviations, and correlation coefficients for all securities.
B) All investors can borrow or lend money at the risk-free rate of return.
C) There are no transaction costs.
D) There are no personal income taxes so that investors are indifferent between capital gains and dividends.

Accepted Answer

The CAPM assumes that all investors have the same expectations about expected returns, standard deviations, and correlation coefficients for all securities, which is known as the homogenous expectations assumption.

Question 11

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

The combination of the risk-free asset and the efficient frontier results in the creation of the capital market line, which shows the expected return for any level of risk.

Question 12

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

Accepted Answer

The weight of the market portfolio should be .30/.25=1.20 and the weight of risk-free asset is 1-1.20=-0.20.Since borrowing is not allowed,Such a market portfolio cannot be constructed.

Question 13

Use the following three statements to answer this question:
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.
I.The CML must always be upward sloping,and it predicts required returns.
II.The CML is based on expected rates of return,so it is ex post.
III.The CML slope is the Sharpe ratio.

Accepted Answer

The Capital Market Line (CML) is upward sloping and predicts required returns, making statement I correct. Statement II is incorrect because the CML is based on expected rates of return, which are ex ante, not ex post. Statement III is correct as the slope of the CML is indeed the Sharpe ratio.

Question 14

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 not the slope of the Capital Market Line (CML) when the portfolio is not the market portfolio. The Sharpe ratio is calculated as the excess return of a portfolio or asset over the risk-free rate divided by the standard deviation of the portfolio or asset's return.

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 represents the highest attainable expected return for any given risk level that includes only efficient portfolios. It is a plot of expected return versus systematic risk (beta) for a portfolio that includes all risky assets.

Question 16

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

Accepted Answer

Weight in market portfolio,11ea8229_34c5_801c_bbd8_2374a870f3b8_TB1726_11 Weight in risk free asset = 1 - 1.5926 = -0.5926
Portfolio standard deviation, 11ea8229_34c5_a72d_bbd8_e1c99ada1aea_TB1726_11

Question 17

The 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, which is a measure of total risk.

Question 18

The CAPM Model makes all the assumptions below EXCEPT:
A) Assuming no transactional costs.
B) Assuming no personal income taxes.
C) Assuming all investors have different expectations about expected returns, and standard deviations for all traded securities.
D) Assuming 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, not different expectations as in option C. The other options, A, B, and D, are correct assumptions made by the model.

Question 19

Min has $5,000 to invest.The expected return on the market portfolio is 11 percent with a standard deviation of 15 percent.What are the expected return and standard deviation for the portfolio if she borrowed $2,000 at the risk-free rate of 4 percent to invest in the market portfolio?
A) Expected return = 19.40%; standard deviation = 15.40%
B) Expected return = 15.40%; standard deviation = 19.40%
C) Expected return = 13.80%; standard deviation = 21.00%
D) Expected return = 21.00%; standard deviation = 13.80%

Accepted Answer

Portfolio expected return,11ea8229_34c7_f128_bbd8_e5accd56dbab_TB1726_11 Portfolio standard deviation,11ea8229_34c7_f129_bbd8_115e11ea0d05_TB1726_11

Question 20

The expected return on the market is 12 percent with a standard deviation of 15 percent and the risk-free rate is 5 percent.What is the required return on an efficient portfolio that has a standard deviation of 18 percent?
A) 10.83%
B) 12.67%
C) 13.40%
D) 14.40%

Accepted Answer

Portfolio expected return,11ea8229_34c7_ca17_bbd8_93383d80e82a_TB1726_11

Quiz 9: The Capital Asset Pricing Model Capm

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

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

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

The expected return on the market is 12 percent with a standard deviation of 20 percent.The risk-free rate is 4.5 percent.What is the Sharpe ratio of a portfolio with an expected return of 10.5 percent and a standard deviation of 12 percent?

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?

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

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

Which of the following is a NOT an assumption of the CAPM?

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

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

Use the following three statements to answer this question:

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

What does the capital market line represent?

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

The CML relates:

The CAPM Model makes all the assumptions below EXCEPT:

Min has $5,000 to invest.The expected return on the market portfolio is 11 percent with a standard deviation of 15 percent.What are the expected return and standard deviation for the portfolio if she borrowed $2,000 at the risk-free rate of 4 percent to invest in the market portfolio?

The expected return on the market is 12 percent with a standard deviation of 15 percent and the risk-free rate is 5 percent.What is the required return on an efficient portfolio that has a standard deviation of 18 percent?