Question

Finance questions (please answer 1, 2 and 3)

1. If the hypothetical equilibrium is achieved based on CAPM model, market portfolio should be the only risky portfolio that all investors hold.

Is the above statement true or false? Give explanations.

2. Sophia and John create their investment portfolios by splitting their wealth between optimal risky portfolio and the riskless T-bills. Sophia invests 30% of her wealth in optimal risky portfolio and 70% in riskless T-bills. John invests 30% of his wealth in T-bills and 70% in optimal risky portfolio.The statement “Sharpe Ratio of Sophia’s portfolio is higher than Sharpe Ratio of John’s portfolio” is:

Select one:

A. False – Sharpe Ratio of Sophia's portfolio is lower than John's portfolio since she invests a lower percentage of her wealth in the risky asset

B. True

C. Need more information to answer

D. None of the above

3. According to asset pricing theory,

Select one:

A. The expected return of an investment has negative linear relationship systematic risk.

B. The expected return of an investment has positive linear relationship firm-specific risk.

C. The expected return of an investment has no relationship with firm-specific risk.

D. The expected return of an investment has no relationship with systematic risk.

Answer 1

1.

False, because there will be other risky assets too, but the return on the risky assets will be adjusted for the risk on those assets for ex. If the one assets is twice as risky as market portfolio it's beta will be 2 and it's required rate of return will be much higher than market portfolio because of the additional risk it takes.

2.

A. False – Sharpe Ratio of Sophia's portfolio is lower than John's portfolio since she invests a lower percentage of her wealth in the risky asset.

3. The expected return of an investment has no relationship with firm-specific risk.