You know that the total risk of stock X is larger then the total risk of the market portfolio which again is larger then the total risk of sock Y.Given that the stocks are all correctly priced according to CAPM , what can you say about their portfolio returns ? (a) Rx > Rm (b) Rm > Ry © Rx >Rm>Ry (d) Not sufficient info provided to answer this question How do u guys think ?
seems more like a hard wording question than a hard question. “which again is larger”… i’m reading that as again x is larger than y return-wise, but seeing as you have no relation to y and the mkt portfolio i’d say A. why am i on this forum at 10am answering L1 questions? beats reading for L2! if it said x is larger riskwise than rm and that x risk is larger than y i’d say C, but at least how i’m reading the question, i don’t think the wording is trying to say that. i don’t think the test will leave much question in your mind in terms of the wording, although they do have a lot of weird double negatives and stuff… remember to read questions slowly and underline whether they ask which is MOST likely or LEAST likely or stuff like that. you guys are prob getting to crunch time for dec. good luck!
I think it is B) Rm>Ry If the total risk of stock Y is less than the risk of the market portfolio, then we have a stock is Beta less than 1- investors should require lower return for such stock;
surprisingly the answer for this is (d) which means not enough info provided but … this is what confuses me … if stock X has higher return the market and Y the it must have higher expecte and required return which in a way makes sense … but which other factors could have been included so we could come to a decision … reflecting that the correct answer is “(d)-not enough info provided”
yeah, ok, i guess that makes sense. what you don’t know is how the mkt portfolio did. you’d expect x to beat the mkt portfolio on an up year, but since it’s beta is going to be bigger, in the whole CAPM world it would do worse in an off year also. so if rm = -2% or something, maybe x is down 4% or whatever (plug #'s into some CAPM equation). man i’m not in CFA mode right now. this gives me motivation to start studying again. that or drink coffee to wake up!
The variable they are talking about is only beta in this question. What if Rm was negative? Beta X = 1.5 Beta Y = .5 Rf = 3% Rm = -7% Rx = 3% + 1.5(-7% - 3%) Rx = -12% Ry = 3% + .5(-7% - 3%) Ry = -2% So if markets are up, stock X will have greater return, markets are down, stock Y will have a higher return (although still negative). Just beat me to it bannisja.
bingo. nice putting #'s to it. ok, you guys have motivated me… going to read my L2 quant for an hour or so now. keep pushing- i’m sure this crew will crush L1 in dec and I’ll see you in crunch time for L2 in June.
The total risk should include unsystematic and systematic risk. Can you say that Beta X is higher than 1?- I do not think you can For stock Y it can be said that its Beta is less than 1 since market portfolio has greater risk than stock Y And I see if the market return is negative- stock Y will have a higher return.
Off topic, hows your studying going so far. I have been off and on studying for L2 (read barely any). I am only about 200 pages into FSA. So far it hasn’t been to bad.
only have read SS11 and SS12 on quant (skipped ethics, I tend to go in order). Reading SS13 today hopefully. Doesn’t seem terrible so far, but I’m so far from hardcore study mode, it’s not even funny. Just got schweser in the mail this week. I might finish up quant mainly out of the CFA books since I’ve been using them, but I envision a switch over to schweser as my main reading source come econ, fsa, etc… if i can get through quant/econ and maybe crack into FSA by end of the year, figure i’ll have plenty of time to gear up and get this thing done by june.
My goal (lofty) was to read the curriculum before February and then read Schweser from then on and do questions. Since I couldn’t register yet, I had to buy the books separate. Now I’ll have two sets of curriculum. Looking for a job/laziness/football season was not accounted for in this decision. Now it seems like a bit of a waste.