Portfolio Risk and Return: Part II

Question 1

We assume that all investors have the same economic expectation and thus have the same expectations of prices, cash flows, and other investment characteristics. This assumption is referred to as ___________________.

Answer 1

homogeneity of expectations

Question 2

The ______________ line is a special case of the capital allocation line, where the risky portfolio is the market portfolio.

Answer 2

capital market

Question 3

Systematic risk is risk that ______ be avoided and is inherent in the overall market.

Answer 3

cannot

Question 4

Nonsystematic risk is risk that is local or limited to a particular asset or industry that need not affect assets _______________.

Answer 4

outside of that asset class

Question 5

beta is calculated as the ____________divided by the ______________

Answer 5

covariance of the return
on i and the return on the market

variance of the market return

Question 6

Sharpe ratio =

Answer 6

(Return - Rf)/STD

Question 7

The Sharpe ratio, however, suffers from two limitations. First, it uses total risk as
a measure of risk when only _________risk is priced. Second, the ratio itself (e.g.,
0.2 or 0.3) is not informative

Answer 7

systematic

Question 8

The Treynor ratio is

Answer 8

like the Sharpe ratio, but with beta instead of STD

Question 9

What is RAP or M2?

Answer 9

Sharpe ratio X STD X Rf

Question 10

Jensen’s Alpha

Answer 10

Return - CAPM return