Topic 6

Question 1

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.

Answer 1

FALSE

Question 2

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).

Answer 2

FALSE; systematic

Question 3

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).

Answer 3

FALSE; diversification eliminates the specific risk.

Question 4

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.

Answer 4

TRUE

Question 5

According to the CAPM, two assets with the same idiosyncratic risk have the same expected return.

Answer 5

FALSE; systematic

Question 6

According to the Markowitz model, all assets have a value of Beta equal to 1.

Answer 6

FALSE; no value of Beta

Question 7

The slope of the SML is determined by the value of Beta

Answer 7

FALSE; by rm-rf

Question 8

According to the CAPM, the expected return is determined by the systematic risk, which is measured by the value of Beta.

Answer 8

TRUE

Question 9

A well diversified portfolio has a beta equal to 0

Answer 9

FALSE, it has any beta

Question 10

A well diversified portfolio has a beta equal to 1

Answer 10

FALSE; a beta=1 can be also a non market portfolio

Question 11

The systematic risk of a portfolio is reduced when increasing the number of risky assets.

Answer 11

FALSE; it increases

Question 12

The idiosyncratic risk of a portfolio is reduced when increasing the number of risky assets.

Answer 12

Beta≠1 with the assets already included (diversification)

Question 13

Market portfolio’s volatility is always equal to 1.

Answer 13

FALSE; Beta is

Question 14

The beta measure the sensitivity of asset returns to changes in market portfolio returns

Answer 14

TRUE

Question 15

According to the CAPM, individual volatility is the only source of risk

Answer 15

FALSE, systematic

Question 16

According to the CAPM, the expected return of a risky asset depends on its total risk.

Answer 16

FALSE, systematic risk

Question 17

The CAPM beta measures:

Answer 17

The systematic risk of an asset.

Question 18

The slope of the SML is the Beta and the slop of the CML is the Sharpe Ratio of the Market Portfolio

Answer 18

FALSE

Question 19

The SML is introduced in the Markowitz model

Answer 19

FALSE; in another model

Question 20

The slope of the SML is the market risk premium and the slope of the CML is the Sharpe Ratio of the Market Portfolio

Answer 20

TRUE

Question 21

The CML with lowest slope generates the most efficient investment opportunity set in the expected return volatile space.

Answer 21

FALSE; with the greatest slope

CML -> CAL with + slope (+RS)

Question 22

According to the CAPM, if the beta of the Apple stock is equal to 1, then

Answer 22

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).

Question 23

The CML can have negative slope while SML cannot

Answer 23

FALSE;

rm-rf>0; [(rm-rf)/σm]>0

Question 24

Because it measures systematic risk, the SML only applies to portfolios and not individual shares

Answer 24

FALSE; universal

Question 25

The slope of the SML is the

Answer 25

market risk premium

Question 26

The slope of the CML is the

Answer 26

Sharpe ratio of the market portfolio

Question 27

By definition, on the CML are placed…

Answer 27

…all investors’ portfolios that combine market portfolio and risk free asset.

Question 28

By definition, on the SML are placed…

Answer 28

…all stocks that are correctly priced according to their beta.

Question 29

A fixed income instrument has a given beta, this beta measures

Answer 29

systematic risk

Question 30

An assumption of the CAPM is the absence of information asymmetries between investors

Answer 30

TRUE

Question 31

CAMP model assumes that there are transaction costs

Answer 31

FALSE

Question 32

Short selling is banned within the Markowitz’s model

Answer 32

FALSE, It is possible wi<0

Question 32

Markowitz’s model shows that assets with higher systematic risk provide higher returns

Answer 32

FALSE; the CAPM model
higher beta = higher return (r)

Question 33

Assumptions of the CAPM model

Answer 33

1. No taxes.
2. No transaction costs.
3. Static –> focus only in what happens one period ahead.
4. Perfect competition; investors are price takers
5. Risky financial assets are divisible and have an exogenous supply.
6. Same interest rate applies to lending and borrowing.
7. Investors optimise according to Markowitz theory (mean-variance tradeoff).
8. Investors share the same information, risk and return expectations for each asset are identical.