6. Capital Asset Pricing Model

Question 1

Which risks are given premiums?

Answer 1

Those which can’t be diversified away (systematic risk)

Question 2

Systematic risk

Answer 2

Arises from the basic variability of stock prices and the tendency for stocks to go along with the market

Question 3

Unsystematic risk

Answer 3

Results from factors peculiar to that particular company

Question 4

What is beta?

Answer 4

A measure of market risk

Question 5

Main assumptions of CAPM

Answer 5

• asset markets are in equilibrium
• investors only care about the risk and return of their portfolios
• homogeneous beliefs about expected returns, variances and covariances
• single period investment horizon

Question 6

Capital market line

Answer 6

Shoes the combinations of portfolio risk and return that are compatible with equilibrium

Question 7

Security market line

Answer 7

Shows combinations of security risk and return that are compatible with equilibrium

Question 8

What is the capital market line?

Answer 8

It shows the combinations of portfolio risk and return that are compatible with equilibrium. It depicts the efficient portfolio frontier in the presence of a risk free asset

Question 9

What is the security market line?

Answer 9

Shows the combinations of security risk and return that are compatible with equilibrium