andytrader

All portfolios on the capital market line are:

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

B) perfectly positively correlated.

C) distinct from each other.

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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 ra,b = 1, then the equation for risk changes to sport = WAsA + WBsB, which is a straight line.

andytrader

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

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

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

andytrader

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

A) Expected return on the market.

B) Risk-free rate.

C) Expected return on the portfolio.

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

andytrader

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

A) expected return over the level of inflation.

B) risk over the level of excess return.

C) excess return per unit of risk.

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

andytrader

An equally weighted portfolio of a risky asset and a risk-free asset will exhibit:

A) more than half the returns standard deviation of the risky asset.

B) less than half the returns standard deviation of the risky asset.

C) half the returns standard deviation of the risky asset.

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A risk free asset has a standard deviation of returns equal to zero and a correlation of returns with any risky asset also equal to zero. As a result, the standard deviation of returns of a portfolio of a risky asset and a risk-free asset is equal to the weight of the risky asset multiplied by its standard deviation of returns. For an equally weighted portfolio, the weight of the risky asset is 0.5 and the portfolio standard deviation is 0.5 × the standard deviation of returns of the risky asset.