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FINC 3640 Exam 2 || Questions and 100% Verified Answers.

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CAPM Market Assumptions correct answers -All investors are price takers -All information relevant to security analysis is free and publicly available - All securities are publicly owned and traded - No taxes on investment returns -No transaction costs -Lending and borrowing at the same risk fr...

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capm market assumptions

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FINC 3640 Exam 2 || Questions and 100% Verified Answers.
CAPM Market Assumptions correct answers -All investors are price takers
-All information relevant to security analysis is free and publicly available
- All securities are publicly owned and traded
- No taxes on investment returns
-No transaction costs
-Lending and borrowing at the same risk free rate are unlimited

CAPM Investor Assumptions correct answers -Investors plan for the same (single-period)
horizon
-Investors are efficient users of analytical methods -> investors have homogeneous expectations
- Investors are rational, mean-variance optimizers

Security Risk Premium (expected excess return) is proportional to correct answers Beta

Implications of CAPM correct answers All investors chose the same portfolio
- Active vs. passive investment strategy
- Hypothetical Equilibrium: All investors choose to hold mkt portfolio
Mkt portfolio is on efficient frontier, optimal risky portfolio

Passive Strategy isn't efficient T or F correct answers False, it is efficient.

Mutual Fund theorem correct answers All investors desire same portfolio of risky assets, can be
satisfied by single mutual fund composed of that portfolio

If passive strategy is costless and efficient, why follow active strategy? correct answers Many
use active strategy so it must be partiallly helpful

Risk Premium of Mkt Portfolio correct answers -demand drives prices, lowers expected rate of
return/ risk premiums
-when premiums fall, investors move funds into risk-free assets
- Equilibrium risk premium of mkt portfolio porportional to: Risk of mkt and Risk aversion of
avrg investor

Security Market LIne correct answers Represents expected return-beta relationship of CAPM

Graphs individual asset risk premiums as a function of asset risk

(CAPM) Alpha correct answers The abnormal rate of return on security in excess of that
predicted by equilibrium model

CAPM is false but these assumptions hold true correct answers Investors should diversify
Systematic risk is the risk that matters
Well-diversified risky portfolio can be suitable for wide range of investors

, Multifactor Models based on empirical observation correct answers -Fama-French three factor
model

Includes: risk premium on size factor
Value Factor (high minus low book to mkt portfolios)

-Momentum Effect Model

-Liquidity or Accounting Factors

What is SML? correct answers The security market line is the bench mark for fair return on risky
assets and provides a "hurdle rate" for internal projects

-porvides the required rate of return that will compentsate investors for the beta risk

CML vs SML correct answers CML - Risk Premium of Efficient Complete Portfolios (mkt
portfolio and risk free asset)

SML - Individual- Asset risk premiums as a function of asset risk (aka beta)

Index Model correct answers Uses realized, not expected returns and is based off S&P 500

- good benchmark because it is unambigious and based on full market rather than a portfolio

CAPM Limitation correct answers Relies on theoretical Market portfolio, which includes all
assets and applies expected returns

Prospect theory states that ____________. correct answers Utility is a function of change in
wealth.

Technical analysis is consistent with ______________. correct answers Behavioral Finance

Majority of U.S. treasury and corporate bonds pay coupon ___________. correct answers
Semiannually

Which of the following statements is correct? correct answers Invoice bond price = quoted bond
price + accrued interest

Invoice bond price = correct answers quoted bond price + accrued interest

A call provision ____________ investment risk of the bond to the bondholder correct answers
Increases

Why majority of preferred stock is held by corporations? correct answers Because it is largely
excluded from taxation.

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