Exam 2 - Chapter 6 [SLIDES]

Question 1

Chapter 5 last page

- possible complete portfolio

Answer 1

Combination of risk free and risky portfolio

Question 2

Chapter 5 last page

Possible complete portfolio

Answer 2

Straight line is the capital allocation line (CAL)

Question 3

Chapter 5
- last page
Possible complete portfolio

Answer 3

Where you want to be on the CAL line is depending on the risk levels you want to take

Question 4

Chapter 5

- possible complete portfolio

Answer 4

What reward you want depending on the risk

Use the slope

Question 5

Portfolio return

Answer 5

The weighted average of individual asset returns

Question 6

The expected return is usually _____ than the standard deviation

Answer 6

Lower

Question 7

When its perfectly positive correlated there is no _______

Answer 7

Diversification

Question 8

In the real world correlated there is no such thing as (2)

Answer 8

1. -1 correlated

2. +1 correlated

Question 9

Amount of rick reduction depends critically on ________

Answer 9

Correlation or covariant

Question 10

Adding securities with correlations _____ in the portfolio will result in risk reduction

Answer 10

< 1

Question 11

If risk is reduced by more than the weighted average of individual asset risks in the portfolio, what happens to the expected return per unit of risk? Or Sharpe ratio

Answer 11

?

Question 12

Why do we want to see the Capital Allocation Line ?

Answer 12

To see the risk and return

Question 13

No matter how diversified your portfolio is, you wont be able to reduce the risk to ____

Answer 13

Zero

Question 14

The set of portfolio that provide the optimal trade-offs are described as the ______ ______

Answer 14

Efficient frontier

Question 15

The efficient frontier are _____ or the _____ diversified possible combinations

Answer 15

Dominant and diverse infield

Question 16

All investors should want a portfolio on the ______ ________

Answer 16

Efficient frontier

Question 17

The opportunity set is obtained by ?

Answer 17

Combination of a risky portfolio and risk-free asset is linear in the return-risk space

Question 18

Equilibrium has the assumption of

Answer 18

We have all the same information

Question 19

Investment opportunity set will be the _____ if it’s in Equilibrium

Answer 19

Same

Question 20

(3) Equilibrium

Answer 20

• Homogeneous beliefs: every investor share the same information
• No transaction costs
• No taxes

Question 21

Then in equilibrium,
Every investor faces the same ______ ______
Every investor would hold the ______ _______ ________

Answer 21

Efficient frontier

same risky portfolio

Question 22

The CAL is called the

Answer 22

Capital Market Line (CML)

Question 23

Then the P is then called the

Answer 23

Market portfolio, M

Question 24

Non diversified what is the expected rate of return for an individual asset

Answer 24

We dont know