Chapter 2: Q8B. (page 225)
Which of the following statements is true? Explain.
a. It is possible that the APT is valid and the CAPM is not.
b. It is possible that the CAPM is valid and the APT is not.
Statement ‘a’ is possible but not statement ‘b’.
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A portfolio’s expected return is 12%, its standard deviation is 20%, and the risk-free rate is 4%. Which of the following would make for the greatest increase in the portfolio’s Sharpe ratio?
a. An increase of 1% in expected return.
b. A decrease of 1% in the risk-free rate.
c. A decrease of 1% in its standard deviation.
A zero-investment well-diversified portfolio with a positive alpha could arise if:
a. The expected return of the portfolio equals zero.
b. The capital market line is tangent to the opportunity set.
c. The law of one price remains un-violated.
d. A risk-free arbitrage opportunity exists.
A market anomaly refers to:
a. An exogenous shock to the market that is sharp but not persistent.
b. A price or volume event that is inconsistent with historical price or volume trends.
c. A trading or pricing structure that interferes with efficient buying and selling of securities.
d. Price behavior that differs from the behavior predicted by the efficient market hypothesis.
Use the following scenario analysis for stocks X and Y to answer CFA Questions
Question: Assume that of your \(10,000 portfolio, you invest \)9,000 in stock X and $1,000 in stock Y. What is the expected return on your portfolio?
We know that the market should respond positively to good news and that good-news events such as the coming end of a recession can be predicted with at least some accuracy. Why, then, can we not predict that the market will go up as the economy recovers?
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