Portfolio

Question 1

Beta

Answer 1

Question 2

CAPM

Answer 2

Question 3

What is CAPM?

Answer 3

A model that describes the relationship between risk and expected return and that is used in the pricing of risky securities.

Question 4

What is the CML line?

Answer 4

The CML is derived by drawing a tangent line from the intercept point on the efficient frontier to the point where the expected return equals the risk-free rate of return.

The CML is considered to be superior to the efficient frontier since it takes into account the inclusion of a risk-free asset in the portfolio. The capital asset pricing model (CAPM) demonstrates that the market portfolio is essentially the efficient frontier. This is achieved visually through the security market line (SML).

Question 5

What does Beta measure?

Answer 5

A measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole.