Topic 3 Quiz Flashcards
The optimal risky asset portfolio will:
A. have the highest Sharpe ratio.
B. be different for investors.
C. can lie on the capital market line but not a capital allocation line.
D. include a risk-free asset.
A. have the highest Sharpe ratio.
What is the relative risk of an individual asset’s risk?
A. The change in the asset’s risk over time.
B. The variance of the asset.
C. The covariance between the asset and the market portfolio divided by the market’s variance.
D. The difference between the actual asset return and its return predicted by the CAPM.
C. The covariance between the asset and the market portfolio divided by the market’s variance.
You plot the return on BHP shares from January 2010 to 2020 against the returns on the market portfolio.
A. Alpha will be the slope of the line of best fit.
B. The line of best fit will reveal if BHP is underpriced or overpriced.
C. The line of best fit will show how sensitive the returns on BHP shares are to market returns.
D. The line of best fit will show how diversification decrease risk.
C. The line of best fit will show how sensitive the returns on BHP shares are to market returns.
Shares in A2Milk are underpriced if:
A. their return lies above the line of best fit.
B. their return lies above the capital asset pricing model.
C. their return lies above the security market line.
D. their return lies above the capital market line.
C. their return lies above the security market line.
Which of the following makes tests of the capital asset pricing model (CAPM) imperfect?
A. The change in the expected return of an asset is the reward for accepting a particular level of systematic risk.
B. They are based on realised not expected returns.
C. They do not assume a stock market index is a reasonable proxy for the market.
D. They assume when market returns increase, the expected return of assets with negative betas will fall.
B. They are based on realised not expected returns.
Which of the following would occur in an efficient market? Select any that are applicable.
A. The CML will have a higher or same slope as the CALs of risky assets.
B. All assets will lie on a SML.
C. All assets will lie on a CAL.
D. Assets with higher betas will have higher expected returns.
A. The CML will have a higher or same slope as the CALs of risky assets.
D. Assets with higher betas will have higher expected returns.
Which of the following statements are true or false?
- The Sharpe Ratio measures the slope of the SML.
- Risky assets can only lie on or below the efficient frontier.
- The CAPM predicts the relationship between an asset’s expected return and its total risk.
- The Sharpe Ratio measures the slope of the SML. FALSE.
- Risky assets can only lie on or below the efficient frontier. TRUE.
- The CAPM predicts the relationship between an asset’s expected return and its total risk. FALSE.
You are investing in a multi-risky asset portfolio. How would you select the best multi-asset portfolio to invest in?
A. It would be the portfolio on the efficient frontier that is tangent to the CAL.
B. It would be the portfolio on the CAL that is tangent to the utility curve.
C. It would be the portfolio on the efficient frontier that is tangent to a utility curve.
C. It would be the portfolio on the efficient frontier that is tangent to a utility curve.
The CAPM is being tested in a share market. What would be the most suitable proxy to use for the market portfolio?
The share price index (e.g. ASX200 for the ASX) for the market.
How can the security market line show that an asset is correctly priced?
The asset will lie on the SML if it is correctly priced, according to the CAPM. If it was underpriced it will lie above the SML (positive alpha) and overpriced if it lies below the SML (negative alpha).
When is trading frictionless in a market?
When there is no ‘friction’ to trading so it easy to buy and sell as the market is liquid.
What are the two components of total risk?
Market (systematic) risk and asset-specific (non-systematic) risk.
How do you find the optimum total asset portfolio for an investor?
It will be the asset portfolio where one of the investor’s indifference curves is tangent to the CML. The optimal risky asset portfolio will be the portfolio where the CML is tangent to the efficient frontier.
