Reading 53: Portfolio Risk and Return: Part II-LOS b 习题精选 2011, allocation, interpret, capital

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Session 12: Portfolio Management
Reading 53: Portfolio Risk and Return: Part II

LOS b: Explain and interpret the capital allocation line (CAL) and the capital market line (CML).

 

 

All portfolios on the capital market line are:

A) unrelated except that they all contain the risk-free asset.

B) distinct from each other.

C) perfectly positively correlated.

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The introduction of a risk-free asset changes the Markowitz efficient frontier into a straight line. This straight efficient frontier line is called the capital market line (CML). Since the line is straight, the math implies that any two assets falling on this line will be perfectly, positively correlated with each other. Note: When r_a,b = 1, then the equation for risk changes to sport = W_As_A + W_Bs_B, which is a straight line.

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The market portfolio in the Capital Market Theory contains which types of investments?

A) All risky and risk-free assets in existence.

B) All stocks in existence.

C) All risky assets in existence.

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The market portfolio contains all risky assets in existence. It does not contain any risk-free assets.

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A portfolio to the right of the market portfolio on the capital market line (CML) is created by:

A) holding both the risk-free asset and the market portfolio.

B) fully diversifying.

C) holding more than 100% of the risky asset.

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Portfolios that lie to the right of the market portfolio on the capital market line are created by borrowing funds to own more than 100% of the market portfolio (M).

The statement, "holding both the risk-free asset and the market portfolio" refers to portfolios that lie to the left of the market portfolio. Portfolios that lie to the left of  point M are created by lending funds (or buying the risk free-asset). These investors own less than 100% of both the market portfolio and more than 100% of the risk-free asset. The portfolio at point R_f (intersection of the CML and the y-axis) is created by holding 100% of the risk-free asset.  The statement, "fully diversifying" is incorrect because the market portfolio is fully diversified.

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Based on Capital Market Theory, an investor should choose the:

A) portfolio with the highest return on the Capital Market Line.

B) portfolio that maximizes his utility on the Capital Market Line.

C) market portfolio on the Capital Market Line.

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Given the Capital Market Line, the investor chooses the portfolio that maximizes his utility. That portfolio may be exactly the market portfolio or it may be some combination of the risk-free asset and the market portfolio.

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Which of the following statements about the capital market line (CML) is least accurate?

A) Investors choose a portfolio on the CML by varying their weightings of the risk-free asset and the market portfolio.

B) The market portfolio lies on the CML and has only unsystematic risk.

C) The CML will not be a linear relationship if investors' borrowing and lending rates are not equal.

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The first part of this statement is true - the market portfolio does lie on the CML. However, the market portfolio is well diversified and thus has no unsystematic risk. The risk that remains is market risk, or nondiversifiable, or systematic risk.

The CML measures standard deviation (or total risk) against returns. The CML will “kink” if the borrowing rate and lending rate are not equal. Investors choose a portfolio on the CML by lending or borrowing at the risk-free rate to vary the weighting of their investments in the risk-free asset and the market portfolio.

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The slope of the capital market line (CML) is a measure of the level of:

A) expected return over the level of inflation.

B) excess return per unit of risk.

C) risk over the level of excess return.

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The slope of the CML indicates the excess return (expected return less the risk-free rate) per unit of risk.

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Which of the following is the vertical axis intercept for the Capital Market Line (CML)?

A) Expected return on the market.

B) Expected return on the portfolio.

C) Risk-free rate.

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The CML originates on the vertical axis from the point of the risk-free rate.

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According to capital market theory, which of the following represents the risky portfolio that should be held by all investors who desire to hold risky assets?

A) Any point on the efficient frontier and to the left of the point of tangency between the CML and the efficient frontier.

B) Any point on the efficient frontier and to the right of the point of tangency between the CML and the efficient frontier.

C) The point of tangency between the capital market line (CML) and the efficient frontier.

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Capital market theory suggests that all investors should invest in the same portfolio of risky assets, and this portfolio is located at the point of tangency of the CML and the efficient frontier of risky assets. Any point below the CML is suboptimal, and points above the CML are not feasible.

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The market portfolio in Capital Market Theory is determined by:

A) a line tangent to the efficient frontier, drawn from any point on the expected return axis.

B) the intersection of the efficient frontier and the investor's highest utility curve.

C) a line tangent to the efficient frontier, drawn from the risk-free rate of return.

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The Capital Market Line is a straight line drawn from the risk-free rate of return (on the Y axis) through the market portfolio. The market portfolio is determined as where that straight line is exactly tangent to the efficient frontier.

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Portfolios that represent combinations of the risk-free asset and the market portfolio are plotted on the:

A) capital asset pricing line.

B) utility curve.

C) capital market line.

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The introduction of a risk-free asset changes the Markowitz efficient frontier into a straight line. This straight efficient frontier line is called the capital market line (CML). Investors at point Rf have 100% of their funds invested in the risk-free asset. Investors at point M have 100% of their funds invested in market portfolio M. Between Rf and M, investors hold both the risk-free asset and portfolio M.  To the right of M, investors hold more than 100% of portfolio M.  All investors have to do to get the risk and return combination that suits them is to simply vary the proportion of their investment in the risky portfolio M and the risk-free asset.

Utility curves reflect individual preferences.