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FINC 603 - Exam 2 || with 100% Accurate Solutions.
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What does the capital market line (CML) indicate? correct answers that the market portfolio maximizes the Sharpe ratio What is the CML invested in correct answers the risk-free asset and the market portfolio Where do individual stocks plot in relation to the CML correct answers Underneath (no...

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FINC 603 - Exam 2 || with 100% Accurate Solutions.
What does the capital market line (CML) indicate? correct answers that the market portfolio
maximizes the Sharpe ratio

What is the CML invested in correct answers the risk-free asset and the market portfolio

Where do individual stocks plot in relation to the CML correct answers Underneath (not on) the
CML

When you own a single stock, what kind of risk are you exposed to? correct answers Firm
specific risk
Systematic risk

What is the risk of an asset held in isolation measured by correct answers variance of returns

What is the risk of an asset held in a portfolio measured by correct answers its covariance of
returns with returns of the portfolio

CML assumptions correct answers - every investor holds market portfolio
- every investor holds every stock (no stock held in isolation)
- required return of every stock relies only on systematic risk bc they aren't held in isolation

What is the best way to achieve a beta of 1.5 correct answers Borrow and invest in market (don't
exactly get this one i thought mkt beta was = 1 help)

What kind of risk do assets on the CML have? (other than Rf) correct answers systematic risk
only

If an asset is correctly priced in CAPM equilibrium what do we know about the E(r) and
standard deviation? correct answers E(r) - same as risk free rate
σ - greater than the market

In CAPM equilibrium what do we know about assets that plot on the CML and SML? correct
answers Every asset that plots on the CML also plots on the SML

If an asset has a beta of 1 in CAPM equilibrium, what do we know about it's price? correct
answers it is correctly priced

If an asset has a beta of 1 in CAPM equilibrium, how is it correlated to the market correct
answers perfectly correlated

What do we know about the Sharpe ratio of assets that are perfectly correlated with the market?
correct answers Their Sharpe ratio is maximized

What is a factor model used for? correct answers - estimate E(r), variances and covariances

, - partition risk into factor and non-factor components
- calculate ex-post alpha and beta

assumptions of single factor model correct answers - cov(ei,ej) = 0
- E(ei) = 0

The right price is the price that provides correct answers the correct E(r)

What does CAPM tell you? correct answers The correct E(r) which is the same as k (required
return)

When is E(r) = Required return? correct answers at the correct price

Which type of risk determines required return? correct answers the risk you are exposed to

What does systematic risk cause correct answers covariance

What does total risk cause? correct answers variance

What does a SIM allow us to find? correct answers Ex post CAPM alpha and beta

Relationship between the factor and the stock correct answers not perfectly linear, we want best
fit

What is the SIM systematic factor? correct answers an index of overall market performance (i.e.
S&P 500) - market risk

What kind of returns does SIM use? correct answers Excess returns

What kind of returns does a single-factor model use? correct answers Raw returns

Every investor wants correct answers the largest risk premium for amount of risk (highest Sharpe
ratio)

Diversified portfolios offer more _______ per unit of risk because... correct answers return
investors are only exposed to systematic risk

The most diversified portfolio is correct answers the market

The highest Sharpe ratio is possible with correct answers the market portfolio

What is the normal shape of a combination line with two risky assets? correct answers C-shaped

The westernmost or leftmost side of a combination line with two risky assets is the correct
answers minimum variance set

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