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Questions and Answers
According to the multifactor model to evaluate style and size exposure of different mutual funds, what are the sensitivities represented as?
According to the multifactor model to evaluate style and size exposure of different mutual funds, what are the sensitivities represented as?
What type of risk is associated with the capital market line (CML)?
What type of risk is associated with the capital market line (CML)?
In the context of portfolio creation, what does the capital allocation line connect?
In the context of portfolio creation, what does the capital allocation line connect?
What type of investors are described as 'risk-averse'?
What type of investors are described as 'risk-averse'?
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If a portfolio is created by investing 25% of the funds in Asset A with a standard deviation of 15% and the balance in Asset B with a standard deviation of 10%, what is the significance of a correlation coefficient of 0.75?
If a portfolio is created by investing 25% of the funds in Asset A with a standard deviation of 15% and the balance in Asset B with a standard deviation of 10%, what is the significance of a correlation coefficient of 0.75?
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According to the CAPM, what is the expected rate of return for a stock with beta = 0.8, when the risk-free rate is 5% and the market rate of return is 10%?
According to the CAPM, what is the expected rate of return for a stock with beta = 0.8, when the risk-free rate is 5% and the market rate of return is 10%?
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What is the WML factor in Carhart model computed as?
What is the WML factor in Carhart model computed as?
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What is an investment said to be if it can easily be converted into cash?
What is an investment said to be if it can easily be converted into cash?
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Which of the following statements about Portfolio diversification is true?
Which of the following statements about Portfolio diversification is true?
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Which of the following statements about multifactor models is least accurate?
Which of the following statements about multifactor models is least accurate?
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Study Notes
Mutual Funds and Multifactor Model
- Sensitivities in the multifactor model are represented as betas, indicating relative sensitivity to various risk factors.
- Multifactors in mutual funds include elements like style and size, influencing performance.
Capital Market Line (CML)
- The capital market line represents the risk-return trade-off and is associated with systematic risk, which is non-diversifiable risk attributable to market movements.
- CML connects expected returns of efficient portfolios with the risk-free rate, illustrating how risk increases with potential return.
Capital Allocation Line (CAL)
- The capital allocation line connects the risk-free asset to efficient portfolios, reflecting different combinations of risk and return based on investor preferences.
Risk-Averse Investors
- Risk-averse investors prefer lower risk investments, valuing capital preservation and seeking reliable returns over speculative opportunities.
Portfolio Construction Example
- A portfolio consisting of 25% in Asset A (15% standard deviation) and 75% in Asset B (10% standard deviation) indicates a diversified approach to risk.
- A correlation coefficient of 0.75 signifies a strong positive relationship between the returns of Asset A and Asset B, impacting overall portfolio risk and return.
Capital Asset Pricing Model (CAPM)
- The expected rate of return for a stock with a beta of 0.8, risk-free rate of 5%, and market rate of return of 10% is calculated as:
- Expected Return = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate) = 5% + 0.8 * (10% - 5%) = 9%.
Carhart Model and WML Factor
- In the Carhart model, the WML (Winners Minus Losers) factor is computed as the return difference between high-performing and low-performing stocks, indicating a momentum strategy.
Liquid Investments
- An investment that can be easily converted into cash is classified as liquid, providing quick access to capital without significant loss in value.
Portfolio Diversification
- True statements about portfolio diversification emphasize the reduction of unsystematic risk by holding a variety of investments, thus enhancing returns relative to risk.
Multifactor Models
- Least accurate statements about multifactor models may include oversimplifications, such as suggesting that all relevant factors are always included, which is rarely the case in practice.
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Description
Test your knowledge of fundamental concepts in investment analysis with this quiz. Questions cover multifactor models, risk associated with the capital market line, and calculating stock beta.
