FRM- 3

Question 1

Final Test of Model Depends

Answer 1

1. Not on How Reasonable the Assumptions Appear

2. But on How Well Model Describes Reality

Question 2

Assumptions To Capital- Asset Pricing Model

Answer 2

1. No Transaction Cost
2. Assets Are Infinitely Divisible
3. No Personal Income Tax
4. No Individual Investor Can Affect Prices of a Stock by Action of Selling or Buying
5. Decisions Solely Based on Expected Return and Risk of Portfolio
6. Unlimited Short Sales Are Allowed
7. Unlimited Lending and Borrowing At Risk-Less Rate
8. & 9. Homogeneity of Expectations
9. All Assets Are Marketable

Question 3

No Transaction Cost

Answer 3

No Cost of Buying or Selling Any Asset

Question 4

Assets Are Infinitely Divisible

Answer 4

Any Position in an Investment

Question 5

No Personal Income Tax

Answer 5

Indifferent to the Form in Which Return on the Investment is Received (Dividend or Capital Gains)

Question 6

No Individual Investor Can Affect Prices of a Stock by Action of Selling or Buying

Answer 6

Investor Cannot Buy in Bulk

Question 7

Homogeneity of Expectations

Answer 7

1. Concerned with the Mean and Variance and Define the Relevant Period in the Same Manner
2. Same Expectations With Respect To Inputs to the Portfolio Decisions

Question 8

Standard CAPM also Called

Answer 8

Sharpe-Lintner-Mossin Form

Question 9

Efficient Frontier Differs Among Investors

Answer 9

Because of Different Expectations Resulting in Different Selection of Risky Assets

Question 10

Homogeneity of Expectations

Answer 10

1. Means Identical Portfolio of Risky Assets for Each Investor
2. In “Equilibrium”, it Leads to Market Portfolio

Question 11

Market Portfolio

Answer 11

1. Demand of a Particular Asset is Same As the Market Value of The Asset
2. Hence Proportion of a Particular Asset is fraction of Market Value of That Asset and Total Market Value

Question 12

Two Mutual Fund Theorem

Answer 12

1. Market Portfolio

2. Risk-Less Security

Question 13

Capital Market Line

Answer 13

Same As Line Connecting Risk- Free and Market Portfolio

Question 14

All Investors

Answer 14

Hold Efficient Portfolios Along CML

Question 15

From Equation of CML

Answer 15

1. Market Price of Risk

2. Price of Time

Question 16

Homogeneity of Expectations

Answer 16

1. All Investors Hold Same Portfolio
2. Sum of Portfolio of All Investors Must Be Same As Tangent Portfolio
3. Tangent Portfolio is Same As Market Portfolio