Study Session 12: Portfolio Management
Why a stock in the area above SML line meaning undervalued, and under SML line meaning overvalued?
An asset has correlation with a portfolio’s return that is less than 1 but has the same standard deviation if returns as the portfolio. Adding some of this asset to the portfolio will most likely:
A. decrease portfolio risk
B. increase portfolio risk
C. increase or decrease portfolio risk depending on the individual securities mix in the portfolio.
The answer is A. Anyone can explain it to help me understand? Thank you!
Which of the following statements is true?
An investment that is not on the efficient frontier always is high risk.
An investment that is not on the efficient frontier always has the lowest returns.
An investment that is not on the efficient frontier may create a portfolio that has a
lower risk for the same return
Can somebody please tell me the answer.
An analyst observes the following historic geometric returns:
Geometric Return (%)
The risk premium for corporate bonds is closest to:
(1 + 0.043)/(1 + 0.0250) – 1 = 1.8%
Can anyone help me with this calculation?
From CFAI book:
Q- Two investors have utility functions that differ only with regard to the coefficient of risk aversion. Relative to the investor with a higher coefficient of risk aversion, the optimal portfolio for the investor with a lower coefficient of risk aversion will most likely have:
- a lower level of risk and return.
- a higher level of risk and return.
- the same level of risk and return.
The relationship between return of an asset “i” and beta is Ri = Rf + betaX (Rm-Rf). Also, beta= correlation(i,m)x StDevi/StDevm.
To have an asset which return is above market return (Ri>Rm), the only way possible is with a beta>1. That means, since correlation(i,m) is by definition contained between -1 and 1, that for an asset to have greater returns than the market it must always have greater risk than the market.
Why is the risk-free rate not used as an intercept in a fundamental factor model?
Hi. I can’t find an exact answer, though I think I know it. When calculating correlation to use in calculation of beta, we should be using the risk-adjusted returns (i.e., excess returns of Ri-Rf) instead of the non-excess returns, right? I ask this because in calculating various performance measures, we take care to specify Rf-Rf. Just want to verify that we take the correlation of the excess returns, and that the outputted correlation coefficient is what is then used in calculating beta.
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