- An investor put 60% of his money into a risky asset offering a 10% return with a standard deviation of returns of 8%, and he put the balance of his funds in the risk-free asset offering 5%. What is the expected return and standard deviation of his portfolio? Expected Return Standard Deviation A) 6.0% 4.8% B) 8.0% 4.8% C) 8.0% 6.8% 2) What is the risk measure associated with the capital market line (CML)? A) Standard Deviation B) Market Risk C) Beta 3) Which of the following statements about the SML and the CML is false? A) Securities that fall on the SML have no intrinsic value to investors B) The market portfolio consists of all the risky assets in the universe C) Investors expect to be compensated for systematic risk
B A C
B A c
B A A
B A C
B B A
B A A
B A A
my bad, i misread question3 , answer should be A I hope I dont screw that up in the exam! uhhh…careful!!!
Damil4real Wrote: ------------------------------------------------------- > 1) An investor put 60% of his money into a risky > asset offering a 10% return with a standard > deviation of returns of 8%, and he put the balance > of his funds in the risk-free asset offering 5%. > What is the expected return and standard deviation > of his portfolio? > > Expected Return Standard Deviation > > A) 6.0% 4.8% > B) 8.0% 4.8% > C) 8.0% 6.8% 60% in Risky E®=10%; SD=8%; 40% in RFR E®=5%; SD=0% Note: Correlation between RFR and ANYTHING RISKY = 0 (in CFA theory) So: Expected return = (0.6)(10%) + (0.4)(5%) = 6% + 2% = 8% Expected SD = (0.6)(8%) = 4.8% (note: this formula works because correlation with RFR=0 and SD(RFR)=0; DON’T use this formula for two risky assets, even if correlation between them is zero) Answer is B > > > > 2) What is the risk measure associated with the > capital market line (CML)? > > A) Standard Deviation > B) Market Risk > C) Beta > Capital Market line has Standard Deviation on the x-axis (representing total risk). Remember that the Security Market Line (SML) has Beta on the x-axis. Otherwise they look pretty similar, since both go through the market portfolio. Answer is A. > > > 3) Which of the following statements about the SML > and the CML is false? > > A) Securities that fall on the SML have no > intrinsic value to investors > B) The market portfolio consists of all the risky > assets in the universe > C) Investors expect to be compensated for > systematic risk A is False. Securities can have value when they are on the SML. It’s just that they are priced appropriately for the amount of systemic risk they carry and there is no value in overweighting or underweighting them in a portfolio. It does make sense to hold them in proportion to the market portfolio, or whatever constraints the portfolio demands.
Correct Answer are: B A A