Exam 8: Portfolio Theory and the Capital Asset Pricing Model

In practice, efficient portfolios are generated using:

The distribution of annual returns for a stock would be closely related to the normal distribution.

According to the CAPM, market portfolio is a risky portfolio.

If a stock is overpriced it would plot:

Briefly explain the term "risk-free rate of interest"

Tests of CAPM have confirmed that Capital Asset Pricing Model holds good under all circumstances.

Florida Company (FC) and Minnesota Company (MC) are both service companies. Their historical return for the past three years are: FC: -5%, 15%, 20%; MC: 8%, 8%, 20%. Calculate the variances of return for FC and MC.

Portfolio Theory was first developed by:

Florida Company (FC) and Minnesota Company (MC) are both service companies. Their historical return for the past three years are: FC: - 5%, 15%, 20%; MC: 8%, 8%, 20%. What is the standard deviation of the portfolio with 50% of the funds invested in FC and 50% in MC?

Given the following data for a stock: beta = 0.9; risk-free rate = 4%; market rate of return = 14%; and Expected rate of return on the stock = 13%. Then the stock is:

Florida Company (FC) and Minnesota Company (MC) are both service companies. Their historical return for the past three years are: FC: - 5%, 15%, 20%; MC: 8%, 8%, 20%. Calculate the mean of returns for each company.

If the beta of Microsoft is 1.13, risk-free rate is 3% and the market risk premium is 8%, calculate the expected return for Microsoft.

The main shortcoming of CAPM is that it

If the expected return of stock A is 12% and that of stock B is 14% and both have the same variance, then investors would prefer stock B to stock A.

Given the following data for the a stock: risk-free rate = 5%; beta (market) = 1.5; beta (size) = 0.3; beta (book-to-market) = 1.1; market risk premium = 7%; size risk premium = 3.7%; and book-to-market risk premium = 5.2%. Calculate the expected return on the stock using the Fama-French three-factor model.

Investors are mainly concerned with those risks that can be eliminated through diversification.

The graphical representation of CAPM (Capital Asset Pricing Model) is called:

Florida Company (FC) and Minnesota Company (MC) are both service companies. Their historical return for the past three years are: FC: - 5%, 15%, 20%; MC: 8%, 8%, 20%. If FC and MC are combined in a portfolio with 50% of the funds invested in each, calculate the expected return on the portfolio.

Suppose you invest equal amounts in a portfolio with an expected return of 16% and a standard deviation of returns of 20% and a risk-free asset with an interest rate of 4%; calculate the standard deviation of the returns on the resulting portfolio:

In the presence of a risk-free asset, the investor's job is to: I. invest in the market portfolio II. find an interior portfolio using quadratic programming III. borrow or lend at the risk-free rate IV. read and understand Markowitz's portfolio theory