Accurate Portfolio theory
What is needed to describe the distribution of stock returns? - Answers-The average return and Standard
Deviation
.What does standard deviation represent? - Answers-Risk
.What does expected return represent? - Answers-Reward
.What are determinants of the variance of a portfolio consisting of two securities? - Answers-The variances and
covariance of the individual securities' returns
.Combining a less risky US stock fund with a more risky international stock fund would reduce the overall risk of
a portfolio if: - Answers-the correlation between the two markets was less than 1
.What will happen to the risk of a portfolio composed of two securities as more dollars are invested in the
riskier asset? - Answers-It can increase or decrease.
.What does the efficient set depend on? - Answers-expected returns and variances of the securities and
covariance between the two
.The Sharpe ratio is the stock's excess return (risk premium) divided by its ____. - Answers-standard deviation
.An investor who borrows additional funds and invests them in a risky asset is probably: - Answers-not very risk
averse
.The Sharpe ratio measures ___. - Answers-risk-adjusted performance
.What are the two components of the expected return on the market (RMRM)? - Answers-The risk premium
, The risk-free rate (RF)
.Where is the market portfolio positioned in relation to the security market line? - Answers-On the security
market line
.If a security's expected return is equal to the risk-free rate of return, and the market-risk premium is greater
than zero, what can you conclude about the value of the security's beta based on CAPM? - Answers-E(Ri) = Rf
+βi(RM - Rf) = Rf → βi= 0
.What is the slope of the security market line (SML)? - Answers-The market-risk premium
.What is a risk premium? - Answers-It is additional compensation for taking risk, over and above the risk-free
rate.
.The security market line will be ____ if the expected return on the market is higher than the risk-free rate. -
Answers-upward sloping
.What is the intercept of the security market line (SML)? - Answers-The risk-free rate
.If investors are risk averse, it is reasonable to assume that the risk premium for the stock market will be: -
Answers-If investors are averse to risk, they will demand higher returns from the market, thereby meaning that
the risk premium will be positive (greater than zero).
.If a security's expected return is equal to the expected return on the market, its beta must be ____. - Answers-
1
.what is modern portfolio theory? - Answers-Risk = stdev
Objective = most efficient
.How do you find the most efficient portfolio? - Answers-Sharpe ratio
What is needed to describe the distribution of stock returns? - Answers-The average return and Standard
Deviation
.What does standard deviation represent? - Answers-Risk
.What does expected return represent? - Answers-Reward
.What are determinants of the variance of a portfolio consisting of two securities? - Answers-The variances and
covariance of the individual securities' returns
.Combining a less risky US stock fund with a more risky international stock fund would reduce the overall risk of
a portfolio if: - Answers-the correlation between the two markets was less than 1
.What will happen to the risk of a portfolio composed of two securities as more dollars are invested in the
riskier asset? - Answers-It can increase or decrease.
.What does the efficient set depend on? - Answers-expected returns and variances of the securities and
covariance between the two
.The Sharpe ratio is the stock's excess return (risk premium) divided by its ____. - Answers-standard deviation
.An investor who borrows additional funds and invests them in a risky asset is probably: - Answers-not very risk
averse
.The Sharpe ratio measures ___. - Answers-risk-adjusted performance
.What are the two components of the expected return on the market (RMRM)? - Answers-The risk premium
, The risk-free rate (RF)
.Where is the market portfolio positioned in relation to the security market line? - Answers-On the security
market line
.If a security's expected return is equal to the risk-free rate of return, and the market-risk premium is greater
than zero, what can you conclude about the value of the security's beta based on CAPM? - Answers-E(Ri) = Rf
+βi(RM - Rf) = Rf → βi= 0
.What is the slope of the security market line (SML)? - Answers-The market-risk premium
.What is a risk premium? - Answers-It is additional compensation for taking risk, over and above the risk-free
rate.
.The security market line will be ____ if the expected return on the market is higher than the risk-free rate. -
Answers-upward sloping
.What is the intercept of the security market line (SML)? - Answers-The risk-free rate
.If investors are risk averse, it is reasonable to assume that the risk premium for the stock market will be: -
Answers-If investors are averse to risk, they will demand higher returns from the market, thereby meaning that
the risk premium will be positive (greater than zero).
.If a security's expected return is equal to the expected return on the market, its beta must be ____. - Answers-
1
.what is modern portfolio theory? - Answers-Risk = stdev
Objective = most efficient
.How do you find the most efficient portfolio? - Answers-Sharpe ratio
