Financial Management - Study Mode

[#726] A measure which is not included in Fama French Three-Factor model is
Correct Answer

(D) risk premium

Explanation

Solution: A measure which is not included in Fama French Three-Factor model is risk premium. The Fama-French three-factor model is an expansion of the capital asset pricing model (CAPM) CAPM formula shows the return of a security is equal to the risk-free return plus a risk premium, based on the beta of that security. The model is adjusted for outperformance tendencies.

[#727] An average return of portfolio divided by its standard deviation is classified as
Correct Answer

(C) Sharpe's reward to variability ratio

Explanation

Solution: An average return of portfolio divided by its standard deviation is classified as Sharpe's reward to variability ratio. The sharpe ratio definition is the excess return or risk premium of a well diversified portfolio or investment per unit of risk. Measure sharpe ratio using standard deviation. You may also know this ratio as the reward to variability ratio or the reward to volatility ratio.

[#728] According to capital asset pricing model assumptions, variances, expected returns and covariance of all assets are
Correct Answer

(A) identical

Explanation

Solution: According to capital asset pricing model assumptions, variances, expected returns and covariance of all assets are identical. The Capital Asset Pricing Model ( CAPM) describes the relationship between systematic risk and expected return for assets, particularly stocks.

[#729] Sum of market risk and diversifiable risk are classified as total risk which is equivalent to
Correct Answer

(D) variance

Explanation

Solution: Sum of market risk and diversifiable risk are classified as total risk which is equivalent to variance.

[#730] Betas tend to move towards 1.0 with passage of time are classified as
Correct Answer

(D) adjusted betas

Explanation

Solution: Betas tend to move towards 1.0 with passage of time are classified as adjusted betas. The Adjusted Beta is an estimate of a security's future Beta. Adjusted Beta is initially derived from historical data, but modified by the assumption that a security's true Beta will move towards the market average, of 1, over time.