23 Lecture

1. What is an efficient portfolio? a) A portfolio that provides maximum return with minimum risk b) A portfolio that provides minimum return with maximum risk c) A portfolio that provides average return with average risk d) A portfolio that provides high return with high risk Answer: a) A portfolio that provides maximum return with minimum risk

2. What is market risk? a) Risk associated with a specific stock b) Risk associated with a specific industry c) Risk associated with the overall market d) None of the above Answer: c) Risk associated with the overall market

3. What is the Capital Market Line (CML)? a) A line that represents the expected return of inefficient portfolios b) A line that represents the expected return of efficient portfolios c) A line that represents the expected return of high-risk portfolios d) A line that represents the expected return of low-risk portfolios Answer: b) A line that represents the expected return of efficient portfolios

4. What is the formula for calculating the expected return of a portfolio? a) Expected return = (Portfolio weight x Individual stock return) + Risk-free rate b) Expected return = (Portfolio weight x Individual stock return) - Risk-free rate c) Expected return = (Portfolio weight x Individual stock return) x Risk-free rate d) None of the above Answer: a) Expected return = (Portfolio weight x Individual stock return) + Risk-free rate

5. Which of the following is true for an efficient portfolio? a) It lies below the CML b) It lies above the CML c) It lies on the CML d) It lies on the security market line (SML) Answer: c) It lies on the CML

6. What is the slope of the CML? a) Risk-free rate b) Market risk premium c) Beta d) Standard deviation Answer: b) Market risk premium

7. What is the relationship between risk and return in an efficient portfolio? a) Direct b) Inverse c) No relationship d) None of the above Answer: a) Direct

8. What is the formula for calculating the expected return of the market portfolio? a) Expected return = Risk-free rate + Beta x (Market return - Risk-free rate) b) Expected return = Beta x (Market return - Risk-free rate) c) Expected return = Market return - Risk-free rate d) None of the above Answer: a) Expected return = Risk-free rate + Beta x (Market return - Risk-free rate)

9. What is the difference between systematic risk and unsystematic risk? a) Systematic risk is the risk that can be diversified away while unsystematic risk cannot be diversified away b) Unsystematic risk is the risk that can be diversified away while systematic risk cannot be diversified away c) Both systematic and unsystematic risks can be diversified away d) None of the above Answer: b) Unsystematic risk is the risk that can be diversified away while systematic risk cannot be diversified away

10. What is the Sharpe ratio? a) A measure of risk-adjusted return b) A measure of market risk c) A measure of unsystematic risk d) A measure of systematic risk Answer: a) A measure of risk-adjusted return

1. What is the efficient portfolio?

Answer: An efficient portfolio is a portfolio that provides the highest return possible for a given level of risk.

2. What is market risk?

Answer: Market risk is the risk of an investment caused by factors that affect the entire market, such as economic downturns, political instability, and natural disasters.

3. What is the Capital Market Line (CML)?

Answer: The Capital Market Line (CML) is a line that represents the risk-return tradeoff for efficient portfolios. It is a graphical representation of the Capital Asset Pricing Model (CAPM).

4. What is the difference between systematic and unsystematic risk?

Answer: Systematic risk is the risk that is inherent in the entire market, while unsystematic risk is the risk that is specific to a particular security or industry.

5. What is the beta of a security?

Answer: The beta of a security is a measure of its volatility in relation to the overall market.

6. What is the Security Market Line (SML)?

Answer: The Security Market Line (SML) is a graphical representation of the Capital Asset Pricing Model (CAPM) that shows the expected return for a given level of risk.

7. What is the Sharpe Ratio?

Answer: The Sharpe Ratio is a measure of risk-adjusted performance that takes into account the return of an investment relative to its risk.

8. What is the difference between a passive and an active investment strategy?

Answer: A passive investment strategy involves investing in a portfolio that tracks the performance of a market index, while an active investment strategy involves attempting to outperform the market by picking individual stocks.

9. What is the difference between a forward contract and a futures contract?

Answer: A forward contract is a customized agreement between two parties to buy or sell an asset at a specific price on a specific date, while a futures contract is a standardized agreement to buy or sell an asset at a specific price on a specific date.

10. What is diversification?

Answer: Diversification is a strategy that involves investing in a variety of assets in order to reduce risk. By spreading investments across different asset classes, sectors, and industries, investors can minimize the impact of any single investment on their portfolio.

The Capital Market Line (CML) is a line that represents the relationship between risk and return of efficient portfolios. Efficient portfolios are those portfolios that offer the highest expected return for a given level of risk, or the lowest risk for a given level of expected return. The CML is derived from the efficient frontier, which is a set of portfolios that offer the highest expected return for a given level of risk. The CML is a linear function that connects the risk-free asset to the market portfolio, which is the portfolio of all risky assets in the market. The slope of the CML is known as the market risk premium, which represents the additional return that an investor can earn for taking on market risk. The CML is useful for investors because it allows them to determine the expected return of a portfolio given its level of risk. The CML is also used to determine the optimal asset allocation for investors. By combining the risk-free asset with the market portfolio, investors can create a portfolio that offers the highest expected return for a given level of risk. This portfolio is known as the optimal portfolio, and it lies on the CML. The CML is an important concept in modern portfolio theory because it shows how investors can balance risk and return to create a portfolio that meets their investment goals. By constructing an efficient portfolio that lies on the CML, investors can maximize their expected return for a given level of risk, or minimize their risk for a given level of expected return.