Podcast
Questions and Answers
The capital asset pricing model asserts that all investors will hold the optimal ______.
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 ______.
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.
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.
Before the 1940s, the concept similar to mutual funds was known as ______ trusts.
The first mutual fund, Massachusetts Investment Trust, emerged in the ______s.
The first mutual fund, Massachusetts Investment Trust, emerged in the ______s.
A mutual fund invests in your behalf in ______, aiming to achieve diversification.
A mutual fund invests in your behalf in ______, aiming to achieve diversification.
It is usually assumed that capital asset pricing model diversifies across all ______.
It is usually assumed that capital asset pricing model diversifies across all ______.
Mutual funds aim to divide profits equally among all who invest, making it ______ in nature.
Mutual funds aim to divide profits equally among all who invest, making it ______ in nature.
To diversify your investments, you'd want to include assets like real estate or ______.
To diversify your investments, you'd want to include assets like real estate or ______.
The exam study materials referred to is a series ______ exam that is relevant for finance careers.
The exam study materials referred to is a series ______ exam that is relevant for finance careers.
Investments can be classified into different types of risk, such as low risk, moderate risk, high risk, and ______.
Investments can be classified into different types of risk, such as low risk, moderate risk, high risk, and ______.
The average return on the stock market in the United States from 1802 to 2012 was ______ % a year, adjusted for inflation.
The average return on the stock market in the United States from 1802 to 2012 was ______ % a year, adjusted for inflation.
On the other hand, the geometric average real short-term government return was only ______ %.
On the other hand, the geometric average real short-term government return was only ______ %.
The difference in returns between stocks and short-term saving vehicles is referred to as the equity premium ______.
The difference in returns between stocks and short-term saving vehicles is referred to as the equity premium ______.
The capital asset pricing model helps to explain investor behavior regarding ______ in the market.
The capital asset pricing model helps to explain investor behavior regarding ______ in the market.
Jeremy Siegel, from the Wharton School, authored a book titled 'Stocks for the ______ run'.
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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