Capm

Question 1

Efficient frontier

Answer 1

Set of portfolios that give the highest return for the given level of risk

Question 2

Capital market line

Answer 2

At a tangent to the efficient frontier- best choice

Question 3

Security market line

Answer 3

The mean return of investment with its beta

Question 4

Equation

Answer 4

Return=risk free rate + B(market risk- risk free rate)

Question 5

Capm assumptions

Answer 5

All investors are efficient and want to target efficient frontier
Investors can borrow and lend any amount of money at risk rate
All investors have homogenous expectations - the same
No tax, transaction costs to buying/selling
Capital markets are correctly priced

Question 6

Capm problem

Answer 6

Unstable betas unless are large portfolio