Chapter 9 CAPM

Question 1

homogeneous expectations

Answer 1

The assumption that all inves- tors agree on the probability distribution of future returns, so they all use the same input list.

Question 2

market portfolio

Answer 2

The portfolio encompassing all assets in which each asset is held in proportion to its market value.

Question 3

mutual fund theorem

Answer 3

A result associated with the CAPM, asserting that investors will choose to invest their entire risky portfolio in a market-index mutual fund.

Question 4

market price of risk

Answer 4

A measure of the extra return, or risk premium, that investors demand to bear risk. The ratio of the risk premium of the market portfolio to the variance of its return.

Question 5

beta

Answer 5

The measure of the systematic risk of a security. The tendency of a security’s returns to respond to swings in the broad market.

Question 6

expected return–beta (or
mean-beta) relationship

Answer 6

Implication of the CAPM that security risk premiums (expected excess returns) will be proportional to beta.

Question 7

security market line (SML)

Answer 7

Graphical representation of the expected return–beta relationship.

Question 8

alpha

Question 9

zero-beta portfolio

Question 10

liquidity

Answer 10

The speed and ease with which an asset can be converted to cash.

Question 11

illiquidity

Answer 11

Difficulty, cost, and/or delay in selling an asset on short notice without offering substantial price concessions.