Financial Management - Study Mode

[#501] According to capital asset pricing model assumptions, quantities of all assets are
Correct Answer

(A) given and fixed

Explanation

Solution: According to capital asset pricing model assumptions, quantities of all assets are given and fixed. The Capital Asset Pricing Model (CAPM) measures the risk of a security in relation to the portfolio. It considers the required rate of return of a security in the light of its contribution to total portfolio risk.

[#502] According to Fama French Three-Factor model, market value of company equity is used to calculate
Correct Answer

(D) size of company

Explanation

Solution: According to Fama French Three-Factor model, market value of company equity is used to calculate size of company. The Fama and French model has three factors: size of firms, book-to-market values and excess return on the market. In other words, the three factors used are SMB (small minus big), HML (high minus low) and the portfolio's return less the risk free rate of return.

[#503] Negative minimum risk portfolio of any security shows that market security sold
Correct Answer

(A) less than original price

Explanation

Solution: Negative minimum risk portfolio of any security shows that market security sold less than original price. Assets that have a negative correlation with each other produce negative portfolio variance. Variance is one measure of the volatility of an asset. An asset with higher variance also carries greater risk.

[#504] In capital asset pricing model, covariance between stock and market is divided by variance of market returns is used to calculate
Correct Answer

(C) beta coefficient of company

Explanation

Solution: In capital asset pricing model, covariance between stock and market is divided by variance of market returns is used to calculate beta coefficient of company. beta of a company measures how the company's equity market value changes with changes in the overall market. It is used in the Capital Asset Pricing Model (CAPM) to estimate the return of an asset.

[#505] Stocks which has high book for market ratio are considered as
Correct Answer

(A) more risky

Explanation

Solution: Stocks which has high book for market ratio are considered as more risky.