Reading 67: A Note on Harry M. Markowitz’s “Market Efficie 日志

土豆妮

Session 18: Portfolio Management: Capital Market Theory and the Portfolio Management Process
Reading 67: A Note on Harry M. Markowitz’s “Market Efficiency: A Theoretical Distinction and So What?”

LOS a: Discuss the efficiency of the market portfolio in the CAPM and the relation between the expected return and beta of an asset when restrictions on borrowing at the risk-free rate and on short selling exist.

 

 

If the market portfolio is not efficient then the relationship between each asset’s expected return and its respective beta:

A) cannot be affected, because the assumption is false: the market portfolio is efficient by definition.

B) is affected such that the Treynor measure will yield unreliable rankings among assets.

C) is affected, but the Treynor measure will still yield reliable rankings among assets.

---

 

If investors are not able to short sell or borrow at the risk-free rate, the market portfolio may not be efficient. If the market portfolio is inefficient, the relationship between beta and expected return in the CAPM may not be linear. If this is the case, using the Treynor or Jensen measure to compare risk-adjusted performance can lead to unreliable rankings.

土豆妮

With respect to the CAPM, if there are restrictions on borrowing at the risk-free rate and on short selling, which of the following is least likely to be result of this condition?

A) The process of adjusting portfolio risk by adjusting the portfolio beta to be more exact.

B) The relationship between each asset’s return and the market return is nonlinear.

C) The Treynor measure yields unreliable rankings among assets.

---

If investors are not able to short sell or borrow at the risk-free rate, the market portfolio may not be efficient. If the market portfolio is inefficient, the relationship between beta and expected return in the CAPM may not be linear. If this is the case, using the Treynor or Jensen measure to compare risk-adjusted performance can lead to unreliable rankings. In addition, adjusting portfolio risk by adjusting the portfolio beta may not expose the investor to the desired level of risk, and this will make the adjustment of portfolio risk using a beta that is less exact.

土豆妮

The capital asset pricing model (CAPM) assumes that investors can borrow at the risk-free rate and short sell, and also, that the market portfolio is efficient. With respect to the risk-free rate and selling short, the market portfolio may NOT be efficient:

A) under no circumstances, the market portfolio is efficient by definition.

B) if either borrowing at the risk-free rate or short-selling is not possible.

C) if both borrowing at the risk-free rate and short-selling are not possible.

---

The capital market line (CML) relies on the assumption that the market portfolio is efficient. That is, the market portfolio lies on the efficient frontier and offers the highest possible level of return for its level of risk. If investors are not allowed or able to short sell or borrow at the risk-free rate, however, the market portfolio may not be efficient.

土豆妮

Which of the following are least likely key assumptions of the CAPM?

A) Investors can borrow and lend at the risk-free rate.

B) Investors throughout the world have identical consumption baskets.

C) Unlimited short selling is allowed with full access to short-sale proceeds.

---

The key assumptions of CAPM are that investors can borrow and lend at the risk-free rate, and that unlimited short selling is allowed with full access to short-sale proceeds. If these assumptions are violated, the market may not be efficient and the relationship between expected return and beta may not be linear. “Investors throughout the world have identical consumption baskets” is an assumption of ICAPM.