Exam 8: Portfolio Theory and the Capital Asset Pricing Model

If the covariance of Stock A with Stock B is -100,what is the covariance of Stock B with Stock A?

The arbitrage pricing theory (APT)implies that the market portfolio is efficient.

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

The main shortcoming of the CAPM is that it:

A stock return's beta measures:

Suppose the beta of Exxon-Mobil is 0.65,the risk-free rate is 4%,and the expected market rate of return is 14%.Calculate the expected rate of return on Exxon-Mobil.

For a company like the aluminum manufacturer Alcoa,what is the most likely factor when developing an arbitrage pricing model?

It is not possible to earn a return that is above the efficient frontier without the existence of a risk-free asset or some other asset that is uncorrelated with your portfolio assets.

The Sharpe ratio is defined as:

According to the CAPM,all investments plot along the security market line.

A factor in APT is a variable that:

If two investments offer the same expected return,then most investors would prefer the one with higher variance.

The correlation coefficient between the efficient portfolio and the risk-free asset is:

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

Explain the term efficient portfolio.

Briefly explain the term risk-free rate of interest.

One would expect a stock with a beta of zero to have a rate of return equal to:

Both the CAPM and the APT stress that unique risk does not affect expected return.

Briefly explain the capital asset pricing model.

All else equal,investors prefer to choose from portfolios having higher Sharpe ratios.