Chapter 2: Q7CP. (page 230)
The following table (for CFA Problems 7 and 8) shows risk and return measures for two portfolios.
When plotting portfolio R on the preceding table relative to the SML, portfolio R lies:
a. On the SML.
b. Below the SML.
c. Above the SML.
d. Insufficient data given.
The Correct answer is ‘d'
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Growth and value can be defined in several ways. Growth usually conveys the idea of a portfolio emphasizing or including only companies believed to possess above-average future rates of per-share earnings growth. Low current yield, high price-to-book ratios, and high price-to-earnings ratios are typical characteristics of such portfolios. Value usually conveys the idea of portfolios emphasizing or including only issues currently showing low price-to-book ratios, low price-to-earnings ratios, above-average levels of dividend yield, and market prices believed to be below the issues’ intrinsic values.
a. Identify and provide reasons why, over an extended period of time, value-stock investing might outperform growth-stock investing.
b. Explain why the outcome suggested in ( a ) should not be possible in a market widely regarded as being highly efficient.
The following table (for CFA Problems 7 and 8 ) shows risk and return measures for two portfolios.
When plotting portfolio R relative to the capital market line, portfolio R lies:
a. On the CML.
b. Below the CML.
c. Above the CML.
d. Insufficient data given.
If the simple CAPM is valid, which of the situations in Problems 13 – 19 below are possible? Explain. Consider each situation independently.
Suppose that, after conducting an analysis of past stock prices, you come up with the following observations. Which would appear to contradict the weak form of the efficient market hypothesis? Explain.
a. The average rate of return is significantly greater than zero.
b. The correlation between the return during a given week and the return during the following week is zero.
c. One could have made superior returns by buying stock after a 10% rise in price and selling after a 10% fall.
d. One could have made higher-than-average capital gains by holding stocks with low dividend yields.
Characterize each company in the previous problem as underpriced, overpriced, or properly priced.
What would be the fair return for each company, according to the capital asset pricing model (CAPM)?
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