Reading 64: Portfolio Concepts-LOS N习题精选 possibly, investor, contrast, face, 2010

honeycfa

LOS n: Compare and contrast the conclusions and the underlying assumptions of the CAPM and the APT models, and explain why an investor can possibly earn a substantial premium for exposure to dimensions of risk unrelated to market movements.

Investors may be able earn a risk premium for holding dimensions of risk unrelated to market movements if:

A) the market is informationally efficient.

B) there is more than one source of systematic risk.

C) unsystematic risk can be diversified away in portfolios.

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Multifactor models that have more than one source of systematic risk allow us to capture other dimensions of risk besides overall market risk. Investors with unique circumstances that differ from the average investor may want to hold portfolios tilted away from the market portfolio in order to hedge or speculate on factors like recession risk, interest rate risk or inflation risk. An investor with lower-than-average exposure to recession risk, for example, can earn a premium by creating greater-than-average exposure to the recession risk factor. In effect, he earns a risk premium determined by the average investor by taking on a risk he doesn’t care about as much as the average investor does.

 

solitute

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honeycfa

The CAPM assumes that all investors will hold the same portfolio of risky assets. With respect to borrowing at the risk-free rate and on short selling, investors may hold very different portfolios:

A) if there are restrictions on both borrowing at the risk-free rate and/or short selling.

B) if there are restrictions on borrowing at the risk-free rate but not on short selling.

C) under no circumstances.

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Restrictions on short selling and/or borrowing at the risk-free rate make investors construct portfolios with considerably different compositions.

honeycfa

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.

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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.

honeycfa

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

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

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

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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.

honeycfa

Which of the following models is NOT consistent with the concept that investors can earn an additional risk premium for holding dimensions of risk unrelated to market movements?

A) The arbitrage pricing theory.

B) The capital asset pricing model (CAPM).

C) Macroeconomic multi-factor models.

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The CAPM suggests that security returns can be captured in a one-factor (market) model. Multifactor models allow us to capture other dimensions of risk besides overall market risk. Investors with unique circumstances that differ from the average investor may want to hold portfolios tilted away from the market portfolio in order to hedge or speculate on factors like recession risk, interest rate risk or inflation risk. In doing so they are able to earn a substantial premium for holding dimensions of risk unrelated to market movements.

honeycfa

Which of the following statements regarding the arbitrage pricing theory (APT) and the capital asset pricing model (CAPM) is least accurate? APT:

A) and CAPM assume all investors hold the market portfolio.

B) does not identify its risk factors.

C) requires fewer assumptions than CAPM.

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CAPM assumes that all investors hold the market portfolio, APT does not make this assumption.

honeycfa

Which of the following is an implication of the capital asset pricing model for investor’s portfolio decisions?

A) Less risk-averse investors will hold less of a broadly based index and more of the risk-free asset.

B) All investors will hold some combination of a broadly based market index and the risk-free asset.

C) Less risk-averse investors will overweight high-beta stocks relative to the market portfolio.

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The CAPM suggests that all investors should hold some combination of the market portfolio and the risk-free asset. Less risk-averse investors will hold more of the market portfolio (and move farther up the CML) and more risk-averse investors will hold more of the risk-free asset (and move farther down the CML).

honeycfa

In the context of multi-factor models, investors with lower-than-average exposure to recession risk (e.g. those without labor income) can earn a risk premium for holding dimensions of risk unrelated to market movements by creating equity portfolios with:

A) greater-than-average market risk exposure.

B) greater-than-average exposure to the recession risk factor.

C) less-than-average exposure to the recession risk factor.

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Multifactor models allow us to capture other dimensions of risk besides overall market risk. Investors with unique circumstances different than the average investor may want to hold portfolios tilted away from the market portfolio in order to hedge or speculate on factors like recession risk, interest rate risk or inflation risk. An investor with lower-than-average exposure to recession risk can earn a premium by creating greater-than-average exposure to the recession risk factor. In effect, he earns a risk premium determined by the average investor by taking on a risk he doesn’t care about as much as the average investor does.