Q6. To calculate the SML for Ofin Finance, Karabon needs:

A)   the covariance between the returns for Ofin Finance and the market portfolio.

B)   expected market returns.

C)   no data beyond what he already possesses.

Q7. Which of Karabon’s statements about the market portfolio is least accurate?

A)   No portfolio along the Markowitz efficient frontier has a higher Sharpe ratio than the market portfolio.

B)   The market portfolio is uninvestable.

C)   The risk of the market portfolio is measured in both standard deviation and systematic risk.

Q8. How does eliminating the ability to lend and borrow at the risk-free rate change the nature of the SML?

          Y-intercept                              Slope

A)  Higher                                     Flatter

B)  Higher                                     No change

C)  Lower                                      Steeper

Q9. An analyst has developed the following data for two companies, PNS Manufacturing (PNS) and InCharge Travel (InCharge). PNS has an expected return of 15% and a standard deviation of 18%. InCharge has an expected return of 11% and a standard deviation of 17%. PNS’s correlation with the market is 75%, while InCharge’s correlation with the market is 85%. If the market standard deviation is 22%, which of the following are the betas for PNS and InCharge?

Beta of PNS       Beta of InCharge

A)  0.66                      0.61

B)  0.61                     0.66

C)  0.92                     1.10

Q10. If the standard deviation of the market’s returns is 5.8%, the standard deviation of a stock’s returns is 8.2%, and the covariance of the market’s returns with the stock’s returns is 0.003, what is the beta of the stock?

A)   0.05.

B)   0.89.

C)   1.07.

答案和详解如下：

Q6. To calculate the SML for Ofin Finance, Karabon needs:

A)   the covariance between the returns for Ofin Finance and the market portfolio.

B)   expected market returns.

C)   no data beyond what he already possesses.

Correct answer is C)

To calculate the SML for an asset, we need expected returns of that asset and the market, the asset’s beta, the risk-free return, and the market risk premium. However, since the market risk premium equals the expected market return minus the risk-free rate, we can calculate any one of the three variables if we are given the other two. By using the market risk premium and the risk-free rate, Karabon can calculate the expected market return.

Q7. Which of Karabon’s statements about the market portfolio is least accurate?

A)   No portfolio along the Markowitz efficient frontier has a higher Sharpe ratio than the market portfolio.

B)   The market portfolio is uninvestable.

C)   The risk of the market portfolio is measured in both standard deviation and systematic risk.

Correct answer is C)

The market portfolio’s risk is generally measured by standard deviation. Systematic risk is used to calculate the SML. Both of the other statements are correct.

Q8. How does eliminating the ability to lend and borrow at the risk-free rate change the nature of the SML?

          Y-intercept                              Slope

A)  Higher                                     Flatter

B)  Higher                                     No change

C)  Lower                                      Steeper

Correct answer is A)

In order to make the SML equation work, a zero-beta portfolio must exist. If we cannot borrow or lend at the risk-free rate, the zero-beta portfolio has a higher expected return than the risk-free rate, which makes the y-intercept higher. The higher return for the zero-beta portfolio also lowers, or flattens, the slope.

Q9. An analyst has developed the following data for two companies, PNS Manufacturing (PNS) and InCharge Travel (InCharge). PNS has an expected return of 15% and a standard deviation of 18%. InCharge has an expected return of 11% and a standard deviation of 17%. PNS’s correlation with the market is 75%, while InCharge’s correlation with the market is 85%. If the market standard deviation is 22%, which of the following are the betas for PNS and InCharge?

Beta of PNS       Beta of InCharge

A)  0.66                      0.61

B)  0.61                     0.66

C)  0.92                     1.10

Correct answer is B)

Beta_i = (s_i/s_M) r ´_I,M
Beta_PNS = (0.18/0.22) x 0.75 = 0.6136
Beta_InCharge = (0.17/0.22) x 0.85 = 0.6568

Q10. If the standard deviation of the market’s returns is 5.8%, the standard deviation of a stock’s returns is 8.2%, and the covariance of the market’s returns with the stock’s returns is 0.003, what is the beta of the stock?

A)   0.05.

B)   0.89.

C)   1.07.

Correct answer is B)

The formula for beta is: (Cov_stock,market)/(Var_market), or (0.003)/(0.058)² = 0.89.

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