Topic 6 Flashcards
The Beta shows the sensitivity of an asset’s excess return to changes in the market return. How much the return decreases when the risk increases one unit.
FALSE
Under the CAPM, agents hold non diversified portfolios, hence they demand a risk premium which depends on the systematic risk of each asset (and not on specific risk).
FALSE; systematic
Under the CAPM, agents hold diversified portfolios, hence they demand a risk premium which depends on the specific risk of each asset (and not on specific risk).
FALSE; diversification eliminates the specific risk.
The Beta shows the sensitivity of an asset’s excess return to changes in the market return. How much the return increases when the risk increases one unit.
TRUE
According to the CAPM, two assets with the same idiosyncratic risk have the same expected return.
FALSE; systematic
According to the Markowitz model, all assets have a value of Beta equal to 1.
FALSE; no value of Beta
The slope of the SML is determined by the value of Beta
FALSE; by rm-rf
According to the CAPM, the expected return is determined by the systematic risk, which is measured by the value of Beta.
TRUE
A well diversified portfolio has a beta equal to 0
FALSE, it has any beta
A well diversified portfolio has a beta equal to 1
FALSE; a beta=1 can be also a non market portfolio
The systematic risk of a portfolio is reduced when increasing the number of risky assets.
FALSE; it increases
The idiosyncratic risk of a portfolio is reduced when increasing the number of risky assets.
Beta≠1 with the assets already included (diversification)
Market portfolio’s volatility is always equal to 1.
FALSE; Beta is
The beta measure the sensitivity of asset returns to changes in market portfolio returns
TRUE
According to the CAPM, individual volatility is the only source of risk
FALSE, systematic
According to the CAPM, the expected return of a risky asset depends on its total risk.
FALSE, systematic risk
The CAPM beta measures:
The systematic risk of an asset.
The slope of the SML is the Beta and the slop of the CML is the Sharpe Ratio of the Market Portfolio
FALSE
The SML is introduced in the Markowitz model
FALSE; in another model
The slope of the SML is the market risk premium and the slope of the CML is the Sharpe Ratio of the Market Portfolio
TRUE
The CML with lowest slope generates the most efficient investment opportunity set in the expected return volatile space.
FALSE; with the greatest slope
CML -> CAL with + slope (+RS)
According to the CAPM, if the beta of the Apple stock is equal to 1, then
On average, the returns generated by Apple must replicate those generated by the S&P500 index.
AND
The Apple stock replicates the returns of the diversified portfolio, also named market portfolio.
(The idiosyncratic risk of the stock of Apple is low).
The CML can have negative slope while SML cannot
FALSE;
rm-rf>0; [(rm-rf)/σm]>0
Because it measures systematic risk, the SML only applies to portfolios and not individual shares
FALSE; universal
The slope of the SML is the
market risk premium
The slope of the CML is the
Sharpe ratio of the market portfolio
By definition, on the CML are placed…
…all investors’ portfolios that combine market portfolio and risk free asset.
By definition, on the SML are placed…
…all stocks that are correctly priced according to their beta.
A fixed income instrument has a given beta, this beta measures
systematic risk
An assumption of the CAPM is the absence of information asymmetries between investors
TRUE
CAMP model assumes that there are transaction costs
FALSE
Short selling is banned within the Markowitz’s model
FALSE, It is possible wi<0
Markowitz’s model shows that assets with higher systematic risk provide higher returns
FALSE; the CAPM model
higher beta = higher return (r)
Assumptions of the CAPM model
- No taxes.
- No transaction costs.
- Static –> focus only in what happens one period ahead.
- Perfect competition; investors are price takers
- Risky financial assets are divisible and have an exogenous supply.
- Same interest rate applies to lending and borrowing.
- Investors optimise according to Markowitz theory (mean-variance tradeoff).
- Investors share the same information, risk and return expectations for each asset are identical.
