Exam 12: Risk/Return and Asset Pricing Models

The first behavioral finance theme involves the concept of heuristics. This term means a rule-of-thumb strategy or good guide to follow in order to shorten the time it takes to make a decision.

In the development of the CAPM, a number of assumptions are required if the model is to be established on a rigorous basis allowing a for a single derivation of the model. These assumptions involve investor behavior and conditions in the capital markets. Which of the below is not one of these underlying assumptions?

Empirically, a comparison of the distribution of historical returns for a large portfolio of randomly selected stocks (say, 50 stocks) with the distribution of historical returns for an individual stock in the portfolio has indicated a curious relationship in that it can be common to find ________.

Returns expected by investors logically should be related to ________ as opposed to total risk

What is the return on a portfolio on a portfolio if the portfolio market value at the beginning of the interval is $1,350, the portfolio market value at the end of the interval is $1,185, and the cash distributions to the investor during the interval is $115.52?

The multifactor CAPM approach entails that a security's return has ________.

An important implication of asset returns following a stable Paretian distribution is that the standard deviation is ________.

A major strength of the CAPM is that it is basically testable because the true market portfolio is an attainable portfolio diversified across all risky assets in the world.

Which of the below is the equation for the return on a portfolio where V₀ = the portfolio market value at the beginning of the interval, V₁ = the portfolio market value at the end of the interval, and D₁ = the cash distributions to the investor during the interval?

Describe the multifactor CAPM and how it extends the CAPM.

The Treasury bill rate is 4.50% and the return on the market is estimated to be 9.50%. If you form a portfolio with a beta of 1.2, what should be your rate of return according to the CAPM?

Which of the below statements is TRUE?

There have been two major attacks on standard portfolio theory. Which of the below is ONE of these?

Some reservations about the CAPM are inevitable because it makes many assumptions about investors' behavior and the structure of the market where assets are traded.

________ postulates that a security's expected return is influenced by a variety of factors, as opposed to just the single market index.

Consider an investor who holds a risky portfolio that has the same risk as the market portfolio. If the beta is one then the investor should expect to earn ________. Consider another investor who holds a riskless portfolio such as Treasury bills. If the beta is zero then the investor should earn ________.