honeycfa

The essence of the capital asset pricing model (CAPM) is embodied in which of the following equations?

A) The security market line (SML).

B) Both the security market line (SML) and the capital market line (CML) as they are both the same equation.

C) The capital market line (CML).

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The SML equation represents the essence of the CAPM.

honeycfa

The expected market premium is 8%, with the risk-free rate at 7%. What is the expected rate of return on a stock with a beta of 1.3?

A) 17.4%.

B) 16.3%.

C) 10.4%.

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RR_Stock = R_f + (R_Market ? R_f) × Beta_Stock, where RR = required return, R = return, and R_f = risk-free rate, and (R_Market ? R_f) = market premium
Here, RR_Stock = 7 + (8 × 1.3) = 7 + 10.4 = 17.4%.

honeycfa

Which of the following statements about portfolio management is most accurate?

A) The security market line (SML) measures systematic and unsystematic risk versus expected return; the CML measures total risk.

B) Combining the capital market line (CML) (risk-free rate and efficient frontier) with an investor's indifference curve map separates out the decision to invest from the decision of what to invest in.

C) As an investor diversifies away the unsystematic portion of risk, the correlation between his portfolio return and that of the market approaches negative one.

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Combining the CML (risk-free rate and efficient frontier) with an investor’s indifference curve map separates out the decision to invest from what to invest in and is called the separation theorem. The investment selection process is thus simplified from stock picking to efficient portfolio construction through diversification.

The other statements are false. As an investor diversifies away the unsystematic portion of risk, the correlation between his portfolio return and that of the market approaches positive one. (Remember that the market portfolio has no unsystematic risk). The SML measures systematic risk, or beta risk.