MPT, SML & CAPM

Question 1

The SML plots expected (required) returns on the Y axis and …

Choose one

Systematic or Total Risk

On the X axis

Answer 1

Systematic risk

(as measured by Beta)

Question 2

Which risk-adjusted performance measure is used to plot the Efficient Portfolio Frontier (EPF) in Markowitz MPT?

Answer 2

Sharpe Ratio

Question 3

True of False

CAPM was written by Harry Markowitz?

Answer 3

False,

CAPM was developed jointly by

Mossin (1966)
Lintner (1965a, 1965b)
Treynor (1962)
Sharpe (1964)

And extended/generalised the MPT framework

Question 4

True or False?

CAPM makes the assumption that investors have access to information and make rational decisions

Answer 4

True

Question 5

Diversification can be used to reduce what type of risk?

Answer 5

Idiosyncratic (diversifiable risk)

As opposed to Systematic risk

Question 6

True or False?

Assets such as expensive art and treasury bonds are valued by investors due to their low correlation with typical equity portfolios?

Answer 6

True

Question 7

Fama-French 5-factor model uses what factors in their asset pricing model

Answer 7

Market (MKT), Size (SMB), Value (HML), Profitability (RMW), Investment (CMA)

Question 8

Factors that are supposed to be systematically priced in the returns of stocks and diversified portfolios are said to be ___ __ factors.

Answer 8

Common Risk factors