Exam 17: A Basic Look at Portfolio Management and Capital Market Theory

An investment has the following range of outcomes and probabilities. 5\% .25 7\% .50 12\% .25 Calculate the expected value and the standard deviation (round to two places after the decimal point where necessary).

The idea behind the portfolio effect is that risk can be reduced by combining securities, but there will be a corresponding reduction in return.

The capital asset pricing model (CAPM) takes off where the efficient frontier concludes, with the introduction of a new investment outlet, the risk-free asset (R_F).

The capital market line (CML) as defined by the capital asset pricing model is characterized by all of the following except:

Points below the efficient frontier have less desirable risk-return characteristics than those along the efficient frontier.

The standard deviation for a portfolio is a weighted average of the individual securities' standard deviations.

Assume a portfolio has the possibility of returning 7%, 8%, 10%, or 12%, with a likelihood of 20%, 30%, 25%, and 25%, respectively. Considering the portfolio's standard deviation and expected value, would you say that this portfolio is of:

If a particular stock is less risky than the market, its beta coefficient will fall somewhere between -1 and 0.

If the market rate of return is 10% and the beta on a particular stock is .78, the return on the stock will be:

It can be assumed that the lower the expected value of an investment, the higher the standard deviation will be.

Systematic risk is rewarded with a premium in the marketplace because:

The essence of the capital market line is that the only way to earn greater returns is to take increasingly greater risks.

The correlation coefficient:

If the _____ of any individual stock is known, an investor can use the _____ to determine the expected rate of return on that stock.

One way to express the trade-off between risk and return for an individual security is through:

Unsystematic risk earns a risk premium, because it cannot be offset through efficient portfolio management.

Risk is generally associated only with loss from possible investments.

An investor is indifferent between points on a risk-return indifference curve, though not indifferent to achieving the highest curve possible.

The risk that is assumed to be rewarded for an individual stock under the capital asset pricing model is measured by the:

The point of tangency between the efficient frontier and the Security Market Line is considered to represent an optimum portfolio.