Exam 2 - Chapter 7 [SLIDES]

Question 1

However, I cannot tell you anything yet for individual asset even if you tell me the STD of the individual asset. Why?

Answer 1

Since it has diversified able risk

Question 2

Decomposition risk

- decompose in 2 risk:

Answer 2

1. Non diversified

2. Diversified

Question 3

Now we know every investor holds the market portfolio M in equilibrium. Thus, not one takes any __________ ____

Answer 3

Diversifiable

Question 4

However, STD’s of individual risky assets contain ______ _________

Answer 4

Diversifiable risk

Question 5

Any pairs of risky is ______ correlated

Answer 5

Positively

Question 6

Diversification effect exists -> each individual risky asset must be subject to a ________ ________

Answer 6

Diversifiable risk

Question 7

The two conditions that has to be satisfied for empirical results

Answer 7

1. Any pari of risky assets is postieively correlated

2. Diversification effects exists each individual risky asset must be subject to diversifiable risk

Question 8

Unsystematic risk is what type of ris k

Answer 8

Diversifiable risk

Question 9

What is systemic risk

What type of risk

Answer 9

Non diversified risk

Question 10

Equilibrium (one major assumption) (learn all this)

Answer 10

Homogenous

Question 11

Limitation of cml line

Answer 11

Combines a diversified portfolio

Question 12

Another names for systematic risk

Answer 12

Non-diversifiable risk

Market risk

Question 13

Systematic/non-diversifiable/market risk:

Answer 13

Risk related to the systematic or macro economic factors

Question 14

Unsystematic/diversifiable/unique/firm specific risk:

Answer 14

Risk not related to the macro factor or market index

Question 15

Another name for unsystematic risk

Answer 15

Diversifiable/unique/firm specific risk

Question 16

No one takes _______ risk in equilibrium

Answer 16

Unsystematic risk

Question 17

You want the equilibrium return because:

Answer 17

To know future cash flows and the price of the stock

Question 18

Market portfolio beta

Answer 18

1

Question 19

Equilbirium relationship between

Answer 19

Return and risk in terms of beta for any asset or portfolio

Question 20

Only what type of risk matters

Answer 20

Systematic risk

Question 21

Systematic risk is used for what

Answer 21

Expected rate of return

Question 22

Expect return on asset i =

Answer 22

Risk free rate + risk premium

Question 23

Risk premium on asset i =

Answer 23

Market risk premium x beta

Question 24

Beta of market portfolio =

Answer 24

1

Question 25

Beta of risk-free asset =

Answer 25

0

Question 26

Beta

Answer 26

Beta is a measure of non-diversifiable risk relative to market portfolio risk

Question 27

Alpha must be ____ if the model is correct and the market is in equilibrium

Answer 27

0

Question 28

If the regression results shows non-zero alpha value, the data indicates that the asset exhibited _______ during the data period

Answer 28

Mispriced

Question 29

If alpha is higher, we get a higher ________ ________ because _____ is higher

Answer 29

Sharpe ratio; u (expected return)

Question 30

You want a ______ Sharpe Ratio

Answer 30

Higher

Question 31

If you are an investor you’re looking for a positive or negative alpha ?

Answer 31

Positive alpha

Question 32

Positive alpha is _______

Answer 32

Underpriced

Question 33

Negative alpha price is ______

Answer 33

Overpriced

Question 34

If you want a positive alpha you want a _____ price

Answer 34

Lower

Question 35

You need same _______ for CAPM Model

Answer 35

Horizons

Question 36

The CAPM is “false” based on the _____________

Answer 36

Validity of its assumptions

Question 37

THE CAPM could still be a useful predictor of ________ ________

Answer 37

``` Expected returns (Empirical returns) ```

Question 38

(CAPM) there may be a huge measurably issue because the market portfolio is ________

Answer 38

Unobservable

Question 39

(CAPM) ______ may not. Be constant over time

Answer 39

Beta

Question 40

As a theory the CAPM is _______

Answer 40

Untestable

Question 41

However, the _______ of the CAPM is testable

Answer 41

Practicality

Question 42

Even if the CAPM is “False” the markets can still be “_______”

Answer 42

Efficient

Question 43

Therefore the CAPM is _____ and _____ understood

Answer 43

Used and well

Question 44

The ______ we learn from the CAPM are still entirely valid

Answer 44

Principles

Question 45

Investors should ______

Answer 45

Diversify

Question 46

Systematic risk is the risk that _____

Answer 46

Matters

Question 47

A well diversified risky portfolio can be suitable for

Answer 47

a wide range of investors

Question 48

Difference in risk tolerances can be handled by changing the ______ _____ decisions in the complete portfolio

Answer 48

Asset allocation

Question 49

Single pricing model is to measure ______

Answer 49

Systematic risk