CAPM

Question 1

What does CAPM stand for

Answer 1

Capital Asset Pricing Model

Question 2

what does correlation measure

Answer 2

how two shares move in relation to each other

Question 3

what does a correlation of 1 mean

Answer 3

they move together

Question 4

what does a correlation of 0 mean

Answer 4

they have no relationship

Question 5

what does a correlation of -1 mean

Answer 5

they move in opposite directions

Question 6

is high or low correlation better for reducting portfolio risk

Answer 6

low

Question 7

are more or less shares included in the portfolio more risky

Answer 7

less is more risky

Question 8

what does the dregree of risk reduction depend on

Answer 8

correlation between the shares

number of shares included in the portfolio

Question 9

can diversification eliminate all risk

Answer 9

no

Question 10

what is the key point of the CAPM

Answer 10

only the non diversifiable portion of risk is rewarded

you can get rid of unique risk from diversification, so why should you be rewarded for taking on risk that can be elimated

Question 11

what is the beta in the CAPM

Answer 11

return on market in excess of risk free rate

how changes in the makret effect the individual interest rate

Question 12

what is the market risk premoium

Answer 12

market return - risk free rate

Question 13

what are the components of the CAPM

Answer 13

Return on risk free asset
Beta
Return on market portfolio
Market risk premium

Question 14

what does the return on market premium usually depend on

Answer 14

country rhat the asset is traded in

benchmark usually used

Question 15

if beta = 1 what does this mean

Answer 15

average risk

Question 16

if beta> 1 what does this mean

Answer 16

above average risk

Question 17

if beta is < 1 what does this mean

Answer 17

below average risk

Question 18

if beta =0 what does this mean

Answer 18

risk free

Question 19

what is the average beta across all equity investments

Answer 19

1

Question 20

where is beta usually listed

Answer 20

along with share price

Question 21

what data is used to calculate beta

Answer 21

past history

how much depends on how much is relevant to firm going forward

Question 22

are high beta shares expected to give a higher average return than low beta shares

Answer 22

yes

Question 23

why are higher beta shares expcted to give higher returns

Answer 23

more risky

Question 24

what does it mean to say that the CAPM is an equilibrium realtionship

Answer 24

it is possilbe to have a high beta share that yields a lower return than a low beta share in a period