24 Lecture

1. What is stock beta? a) A measure of a stock's volatility compared to other stocks b) A measure of a stock's volatility compared to the overall market c) A measure of a stock's dividend yield d) A measure of a stock's price-to-earnings ratio

Answer: b) A measure of a stock's volatility compared to the overall market

2. What is portfolio beta? a) The return on investment of a portfolio b) The standard deviation of a portfolio c) A weighted average of individual stock betas within a portfolio d) A measure of a portfolio's dividend yield

Answer: c) A weighted average of individual stock betas within a portfolio

3. What is the Security Market Line (SML)? a) A line representing the relationship between the risk and return of a security b) A line representing the relationship between the price and earnings of a security c) A line representing the relationship between the dividend yield and price of a security d) A line representing the relationship between the market cap and volume of a security

Answer: a) A line representing the relationship between the risk and return of a security

4. What does a stock lying above the SML indicate? a) It is undervalued b) It is overvalued c) It is fairly valued d) None of the above

Answer: a) It is undervalued

5. What does a stock lying below the SML indicate? a) It is undervalued b) It is overvalued c) It is fairly valued d) None of the above

Answer: b) It is overvalued

6. If a stock has a beta of 1.5, what does it mean? a) The stock is less volatile than the market b) The stock is more volatile than the market c) The stock has the same volatility as the market d) The stock has no volatility

Answer: b) The stock is more volatile than the market

7. If a portfolio has a beta of 0.8, what does it mean? a) The portfolio is less risky than the market b) The portfolio is more risky than the market c) The portfolio has the same risk as the market d) The portfolio has no risk

Answer: a) The portfolio is less risky than the market

8. What is the formula for calculating portfolio beta? a) The sum of individual stock betas in the portfolio b) The weighted average of individual stock betas in the portfolio c) The product of individual stock betas in the portfolio d) The difference between individual stock betas in the portfolio

Answer: b) The weighted average of individual stock betas in the portfolio

9. What is the slope of the Security Market Line (SML)? a) Beta b) Alpha c) R-squared d) Standard deviation

Answer: a) Beta

10. What is the intercept of the Security Market Line (SML)? a) Risk-free rate b) Expected return c) Market risk premium d) Dividend yield

Answer: a) Risk-free rate

1. What is the stock beta, and how is it calculated? Answer: Stock beta measures the sensitivity of a stock's returns to the market returns. It is calculated as the covariance of the stock returns with market returns divided by the variance of the market returns.

2. How is the portfolio beta calculated for a given set of stocks in a portfolio? Answer: The portfolio beta is calculated as the weighted average of the individual stock betas in the portfolio. The weight of each stock is its proportion of the total portfolio value.

3. What is the significance of beta in investing? Answer: Beta is significant in investing because it measures the risk of a stock or portfolio relative to the overall market. Investors can use beta to adjust their portfolio risk exposure based on their risk tolerance.

4. What is the Security Market Line (SML), and how is it used in portfolio analysis? Answer: The Security Market Line (SML) is a graphical representation of the Capital Asset Pricing Model (CAPM), which shows the expected return on an investment as a function of its beta. It is used in portfolio analysis to determine whether an investment is undervalued or overvalued based on its expected return and beta.

5. What is the difference between systematic risk and unsystematic risk? Answer: Systematic risk is the risk associated with the overall market and cannot be diversified away, while unsystematic risk is the risk associated with a specific company or industry and can be diversified away by investing in a diversified portfolio.

6. How does diversification affect portfolio risk? Answer: Diversification reduces portfolio risk by spreading investments across different asset classes, sectors, and companies. This helps to reduce the impact of individual stock or sector risk on the overall portfolio.

7. What is the difference between beta and standard deviation? Answer: Beta measures the risk of a stock or portfolio relative to the market, while standard deviation measures the volatility of returns around the mean. Beta measures systematic risk, while standard deviation measures total risk.

8. What is the Capital Asset Pricing Model (CAPM), and how is it used in portfolio analysis? Answer: The Capital Asset Pricing Model (CAPM) is a model that describes the relationship between risk and expected return in a portfolio. It is used in portfolio analysis to determine the expected return of an investment based on its beta and the market risk premium.

9. What is the market risk premium, and how is it calculated? Answer: The market risk premium is the additional return that investors expect to receive for taking on the risk of investing in the overall market. It is calculated as the difference between the expected return on the market and the risk-free rate of return.

10. What are some limitations of the CAPM and the SML in portfolio analysis? Answer: Some limitations of the CAPM and the SML in portfolio analysis include the assumption of market efficiency, the use of historical data, and the lack of consideration of non-market risk factors.

Stock beta, portfolio beta, and the Security Market Line (SML) are important concepts in finance that help investors and financial analysts to understand the risk and expected return of a security or portfolio. Stock beta measures the sensitivity of a stock's returns to changes in the market. A beta of 1 means that the stock's returns move in line with the market, while a beta of less than 1 means that the stock's returns are less volatile than the market, and a beta of greater than 1 means that the stock's returns are more volatile than the market. Portfolio beta measures the risk of a portfolio by taking into account the risk of each stock in the portfolio and its weight in the portfolio. A portfolio with a beta of 1 has the same risk as the market, while a portfolio with a beta of less than 1 is less risky than the market, and a portfolio with a beta of greater than 1 is more risky than the market. The Security Market Line (SML) is a graph that represents the expected return of a security or portfolio given its beta. The SML is a straight line that starts at the risk-free rate and slopes upward to represent the risk premium that investors demand for taking on additional market risk. The SML helps investors and financial analysts to determine whether a security or portfolio is undervalued or overvalued by comparing its expected return to its required return. If a security or portfolio lies above the SML, it is undervalued and offers an expected return that is greater than its required return. If a security or portfolio lies below the SML, it is overvalued and offers an expected return that is lower than its required return.