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CA Final Modern Portfolio Theory — practice questions — page 2

Explore 73 free Modern Portfolio Theory questions in CA Final Strategicfinancialmanagement. Open each question or exercise to read its content, reference answers and available explanation.

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Modern Portfolio Theory questions and exercises with answers

Showing questions 31–60 of 73.

A stock's beta is 1 with a risk-free rate of 7% and a market return of 13%. What does CAPM give as its required return?Read the answer and worked solution →An asset has a beta of zero. Under CAPM its required return equalsRead the answer and worked solution →On the security market line, which variable is on the horizontal axis?Read the answer and worked solution →The vertical intercept of the security market line is theRead the answer and worked solution →A security plotting above the SML offers a return higher than its risk requires, so it is regarded asRead the answer and worked solution →A security with an expected return of 15% has a CAPM required return of 12%. It plotsRead the answer and worked solution →A share has an expected return of 9% but CAPM requires 11%. The share isRead the answer and worked solution →In equilibrium, where should all correctly priced assets plot?Read the answer and worked solution →The risk-free rate is 4% and the market return 11%. What is the market risk premium?Read the answer and worked solution →Which two economists are credited with CAPM's conceptualisation?Read the answer and worked solution →Sharpe won the Nobel Prize in Economic Sciences in which year for his role in developing CAPM?Read the answer and worked solution →Which version of CAPM replaces the risk-free rate with the return of a zero-beta portfolio?Read the answer and worked solution →A zero-beta portfolio in Black's CAPM is one that hasRead the answer and worked solution →Roughly how many securities can diversify away most specific risk in developed markets such as the UK or US?Read the answer and worked solution →Under CAPM, which risks does a rational investor expect to be rewarded for bearing?Read the answer and worked solution →Which term describes the risk common to all securities, such as general market risk?Read the answer and worked solution →Which CAPM assumption concerns lending and borrowing?Read the answer and worked solution →CAPM assumes investors' expectations areRead the answer and worked solution →CAPM assumes that trading takes placeRead the answer and worked solution →As price takers in CAPM, investorsRead the answer and worked solution →After CAPM gives a discount rate, the intrinsic value of an asset is found byRead the answer and worked solution →A share trades above its CAPM-based intrinsic value. It is consideredRead the answer and worked solution →Fama and French argued that the failure of CAPM in empirical tests implies that most applications of the model areRead the answer and worked solution →A mean-reverting beta is often calledRead the answer and worked solution →Which economists independently introduced CAPM in the 1960s along with Treynor and Sharpe?Read the answer and worked solution →An asset has an expected return of 15% above the risk-free rate and a standard deviation of 10%. Its Sharpe ratio isRead the answer and worked solution →A fund earns 16% while the risk-free rate is 4% and its standard deviation is 8%. What is its Sharpe ratio?Read the answer and worked solution →Fund A has Sharpe ratio 0.9 and fund B 0.6. Which is supported?Read the answer and worked solution →The Sharpe ratio of a portfolio is negative. This means itRead the answer and worked solution →The Sharpe ratio's denominator is theRead the answer and worked solution →

Worked practice questions

A stock's beta is 1 with a risk-free rate of 7% and a market return of 13%. What does CAPM give as its required return?

  1. 7%
  2. 13%
  3. 6%
  4. 20%
Show answer and solution

Correct answer: B. 13%

With beta equal to 1, required return = 7% + 1 x 6% = 13%, the market return.

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An asset has a beta of zero. Under CAPM its required return equals

  1. the market return
  2. zero percent
  3. the risk-free rate
  4. twice the premium
Show answer and solution

Correct answer: C. the risk-free rate

The formula adds beta times the premium to the risk-free rate, so zero beta leaves only the risk-free rate.

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On the security market line, which variable is on the horizontal axis?

  1. Standard deviation
  2. Total variance
  3. Bond duration
  4. Beta coefficient
Show answer and solution

Correct answer: D. Beta coefficient

The SML shows expected return on the vertical axis against systematic risk, beta, on the horizontal.

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