Financial Management - Study Mode

[#1081] Formula written as market risk premium divided by standard deviations of returns on market portfolio is used to calculate
Correct Answer

(A) capital market line

Explanation

Solution: Formula written as market risk premium divided by standard deviations of returns on market portfolio is used to calculate capital market line. Capital market line (CML) is a graph that reflects the expected return of a portfolio consisting of all possible proportions between the market portfolio and a risk-free asset.

[#1082] In capital asset pricing model, investors assume that buying and selling activity will
Correct Answer

(B) not affect stock prices

Explanation

Solution: In capital asset pricing model, investors assume that buying and selling activity will not affect stock prices. The Capital Asset Pricing Model (CAPM) describes the relationship between systematic risk and expected return for assets, particularly stocks. CAPM is widely used throughout finance for pricing risky securities and generating expected returns for assets given the risk of those assets and cost of capital.

[#1083] For investors, steeper slope of indifference curve shows more
Correct Answer

(A) risk averse investor

Explanation

Solution: For investors, steeper slope of indifference curve shows more risk averse investor. A risk averse investor is an investor who prefers lower returns with known risks rather than higher returns with unknown risks. In other words, among various investments giving the same return with different level of risks, this investor always prefers the alternative with least interest.

[#1084] Positive minimum risk portfolio of any security shows that market security sold
Correct Answer

(D) greater than original price

Explanation

Solution: Positive minimum risk portfolio of any security shows that market security sold greater than original price. A minimum variance portfolio indicates a well-diversified portfolio that consists of individually risky assets, which are hedged when traded together, resulting in the lowest possible risk for the rate of expected return.

[#1085] Third factor in Fama French three factor model is ratio which is classified as
Correct Answer

(B) market to book ratio

Explanation

Solution: Third factor in Fama French three factor model is ratio which is classified as market to book ratio. 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.