Practice Q's from Quizzes Flashcards
Is it true that in complete markets, all you need to price any asset is contingent claim prices?
Yes
Is it true that In any asset pricing model with a stochastic discount factor representation, payoff risk is only priced if it is correlated with the stochastic discount factor.
yes
Is it true that No one should hold assets that contain unpriced idiosyncratic risk because these assets do not compensate their holders with a risk premium.
No
The consumption-based model is an example for relative asset pricing.
False
Is it true that Idiosyncratic risk is uncorrelated with the stochastic discount factor.
yes
Is it true that Arbitrage-free pricing is better suited for derivative pricing because absolute pricing models like the consumption-based model require normally distributed payoffs.
no that is false
Is it true that The risk adjustment in the consumption-based model depends on the covariance between marginal utility and an asset’s payoff.
yes
is it true that the price-payoff formulation used in the lecture is very flexible as it can be applied, e.g., to bonds, stocks, and options simultaneously.
yes
When we use the stochastic discount factor approach to asset pricing and write down an equation of the form p= E(mx)
, we implicitly make which assumptions?
all assets can be bought and sold without transaction costs,
market prices satisfy the law of one price
No need for market efficiency or rational investors
Which statements apply to the consumption-based model of asset pricing?
it is an example for the absolute asset pricing approach,
it implies the existence of a stochastic discount factor representation,
it works in both complete and incomplete markets
The mean variance frontier is
the set of all returns that minimize the variance for given expected return,
the set of all returns that minimize the standard deviation for given expected return,
the set of all payoffs with price 1 that minimize the second moment for given expected payof
Is it true that In an asset market that includes a risk-free asset, the tangency portfolio is the risky asset portfolio with the maximum absolute Sharpe ratio.
Yes
Is it true that The CAPM holds if and only if the return on the total wealth portfolio is mean-variance efficient.
yes
Is it true that When estimating a linear factor model, we can use a cross-sectional regression to estimate the factor risk premia
Yes
Is it true that The systematic component of a payoff has always the same expectation as the payoff but it can have a lower price.
No that is false
Is it true that The two funds theorem implies that the mean-variance frontier is a straight line in the payoff space.
Yes
Is it true that If there are at least two assets with different expected return in the asset market, then the SDF return and the constant-mimicking return cannot be the same.
Yes
Is it true that When combining two assets to a portfolio, the combinations of return mean and variance achievable lie on a parabola in the mean-variance space.
Yes
is it true that All mean-variance efficient payoffs can be replicated by a portfolio that invests into the SDF payoff and the constant-mimicking payoff.
Yes
Imagine you have discovered that the stock of MV corporation, which is not risk-free, yields a return that is mean-variance efficient. There is also a risk-free asset in the market and the law of one price holds. Which conclusions are true?
The tangency portfolio of risky assets consists solely of MV corporation’s stock,
A linear one-factor model whose factor is the return on MV corporation can be used to price stocks,
A linear one-factor model whose factor is the return on MV corporation can be used to price options,
The return on MV corporation’s stock and the SDF payoff x* are perfectly correlated
