Questions and Answers
The capital asset pricing model asserts that all investors will hold the optimal ______.
portfolio
The slope of the line fitted to the scatter points is called ______.
beta
Diversification is difficult for individual investors because they often have to buy fractional ______ of each company.
shares
Before the 1940s, the concept similar to mutual funds was known as ______ trusts.
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The first mutual fund, Massachusetts Investment Trust, emerged in the ______s.
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A mutual fund invests in your behalf in ______, aiming to achieve diversification.
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It is usually assumed that capital asset pricing model diversifies across all ______.
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Mutual funds aim to divide profits equally among all who invest, making it ______ in nature.
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To diversify your investments, you'd want to include assets like real estate or ______.
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The exam study materials referred to is a series ______ exam that is relevant for finance careers.
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Investments can be classified into different types of risk, such as low risk, moderate risk, high risk, and ______.
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The average return on the stock market in the United States from 1802 to 2012 was ______ % a year, adjusted for inflation.
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On the other hand, the geometric average real short-term government return was only ______ %.
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The difference in returns between stocks and short-term saving vehicles is referred to as the equity premium ______.
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The capital asset pricing model helps to explain investor behavior regarding ______ in the market.
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Jeremy Siegel, from the Wharton School, authored a book titled 'Stocks for the ______ run'.
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Study Notes
Capital Asset Pricing Model (CAPM)
- CAPM is a model designed to determine the optimal portfolio for investors.
- All investors are theoretically expected to hold the optimal portfolio to maximize returns based on risk.
Beta and Diversification
- The slope of the fitted line in a scatter diagram, comparing market returns to Apple Computer returns, is known as beta.
- Diversification is crucial; investors should spread their investments across various assets to reduce risk.
- Individual investors often struggle to achieve adequate diversification due to the challenge of buying fractional shares.
Role of Investment Funds
- Investment funds emerged as a solution to help small investors diversify their portfolios effectively.
- Mutual funds evolved from investment trusts, with the first mutual fund, Massachusetts Investment Trust, created in the 1920s.
- Mutual funds invest on behalf of shareholders, distributing profits equally among all investors.
Achieving Complete Diversification
- Complete diversification often includes a range of asset types, beyond just stocks and bonds, such as real estate and commodities.
- The traditional view assumed that diversification is across all stocks and possibly bonds, but a more thorough approach includes a wider asset class variety.
Risk Classification in Investments
- Investments can be classified based on risk: low, moderate, high, and speculative.
- The typical perception might imply investors should aim for higher-risk speculative investments, yet CAPM suggests holding a variety of assets helps manage risk.
Historical Returns and Equity Premium Puzzle
- Jeremy Siegel's research from 1802 to 2012 shows a real return of 6.6% per year for stocks, adjusting for inflation.
- Conversely, short-term government securities yielded a real return of only 2.7%.
- The equity premium, representing the additional return from stocks compared to short-term government investments, averaged 3.9% over 200 years.
- This disparity raises the equity premium puzzle: why do investors continue to prefer lower-returning investments despite higher historical returns from stocks?
Understanding Investment Strategies
- Answering the equity premium puzzle is a focus for understanding CAPM's broader implications on investing strategies over time.
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Description
This quiz explores the Capital Asset Pricing Model (CAPM) and its applications for determining optimal investment portfolios. It also delves into beta as a risk measure, the importance of diversification, and the role of mutual funds in helping investors manage their portfolios effectively. Test your knowledge on these key investment concepts!
