Question

According to the CAPM, which of the following is false regarding the market portfolio?

		All securities in the market portfolio are held in proportion to their market values.
		It includes all risky assets in the world.
		It is always the minimum-variance portfolio on the efficient frontier.
		It lies on the efficient frontier.
		None of the above.

Which of the following statements about correlation is least accurate?

		If the correlation coefficient is 0, a zero-variance portfolio can be constructed.
		Diversification reduces risk when correlation is less than +1.
		The lower the correlation coefficient, the greater the potential benefits from diversification.
		Correlation coefficient ranges from -1 to +1.
		All the above statements are accurate.

Which of the following statements about risk-averse investors are true? A risk-averse investor _________.

   [I]            seeks out the investment with minimum risk, while return is not a major concern.
             [II]           will take on additional risk if sufficiently compensated for the risk.
             [III]          will only invest in bonds.

		I only.
		II only.
		III only.
		I and II only.
		None of statements I, II, or III are true.

According to the CAPM:

		An investor who is risk adverse should hold at least some of the risk-free asset in his portfolio.
		All investors who take on risk will hold the identical portfolios of risky assets.
		A stock with high risk, measured as standard deviation of returns, will have high expected returns in equilibrium.
		Individual investors are price setters.
		None of the above.

You have a $300,000 portfolio consisting of Starhub, Singtel and M1. You put $150,000 in Starhub, $90,000 in Singtel and the rest in M1. Starhub, Singtel and M1 have betas of 1.4, 1.8 and 0.7 respectively. What is your portfolio beta?

		1.3
		1.38
		1.4
		1.455
		1.605

Answer 1

Answer:-

Part 1:

According to CAPM below statement is false regarding Market Portfolio:-

It is always the minimum variance portfolio on efficient frontier. This statement is false because Market Portfolio is the point of intersection between Capital Market Line and Efficient Frontier. CAPM assumes that all investors are risk averse and will only accept higher risk when compensated through proportionately higher returns.

Part 2:

Following statement about co-relation is least accurate:-

If co-relation coefficient is 0, a zero variance portfolio can be constructed. A zero variance portfolio can be constructed using co-coefficient of -1.

Part 3: Answer - II only

A risk averse investor will take additional risk if sufficiently compensated for additional risk.

Part 4:

According to CAPM an investor who is risk averse should hold at least some of risk free assets in his portfolio.

Part 5:

Portfolio Beta is weighted average of the betas of different stocks in portfolio.

	Beta	Investment	Weight
Starhub	1.4	$150000	(150000/300000)*100 = 50%
Singtel	1.8	$90000	(900000/300000)*100 = 30%
M1	0.7	$60000	(60000/300000)*100 = 20%

Beta of the portfolio is :-

(50%*1.4) + (30%*1.8) + (20%*0.7)= 0.7+0.54+0.14 = 1.38