ee) Portfolio Management Questions Latest Portfolio Management MC@ Objective Questions a PEPER ABA Racial . CRE eon oa Start Complete Exam Preparation ei Practice fox} Mock Tests as Corres a Ga Download App Question 1: View this Question Online > The Capital Asset Pricing Model (CAPM) establishes the relationship between 1. Risk and value of the firm. 2. Risk and EPS. 3. Risk and average rate of return. 4, Risk and the required rate of return. Answer (Detail@Solution Below) _ 3: Risk and average rate of return.coaching India’s Super Teachers for all govt. exams Under One Roof cd Sea ad Portfolio Management Question 1 Detailed Solution The correct answer is Risk and average rate of return © Key Points The Capital Asset Pr \g Model (CAPM) establishes the relationship between two k: y concepts: + Expected return on an asset: This refers to the average fetutn an investor expects to earn over rm by holding an asset, considering bath dividend income and capital appreciation S isk (market risk): This is the portion of an/asset's risk that cannot be diversified away through portfolio diversificath@igik reflects the overall volatility of the market and a all assets to some degree. cts CAPM essentially predicts that the expected return on an asset should increase proportionally with its systematic risk. In other words, assets with higher levels of market risk should, on average, offer higher returns to compensate investors for the additional vclatility they are taking on. Here's the core formula of CAPM: Expected return on asset = Risk-free rate + Beta * (Market expected return - Risk-free rate) + Risk-free rate: TI bonds + Beta: This is a measure of an asset's systematic risk, indicating its volatility relative to the overall market. A beta of 1 means the asset moves in line with the market, while a beta greater than 1 indicates higher volatility, and a beta less than 1 indicates lower volatility. + Market expected return: This is the average return investors expect from the overall market. epresents the return onan investment with no risk, such as government Therefore, CAPM provid based on its market risk and compare it to its current market price to make informed inve: decisions framework for investors to estimate the expected return on an asset entTeer cnc) yes Sela Mu CM CMe li cel) nes ee Mock Tests Git Question Bank ira Download App Question 2: View this Question Online > Contrast to individual stocks, stability of Portfolio Risk (B) dramatically increases with A. High retum portfolios (Rp > Re) B. Larger portfolios (np > 50) ger Investment duration (ts > 26 weeks) Ne trading volume (Rp > Ruy) E. High premium portfolios (Re > Ry) Choose the correct answer from the options given below: 4. A, Band Conly 2. B, Cand Donly 3. C,Dand E only 4. A, Dand E only Answer (Detailed Solution Below) Option 2: B, C and D only Portfolio Management Question 2 Detailed Solution The correct answer is B, C and D only.© Key Points The correct answer is (B), (C), and (D). The stability of portfolio risk (8) ——_ following factors: + Number of assets in the portfolio (np): As the number of assets in the portfolio increases, the individual risks of the assets in the portfolio tend to cancel each other out, resulting in a more stable portfolio. A portfolio with more than 50 assets is considered to be large enough to achieve this effect. + Length of investment duration (tp): The longer the investment duration, the more time the portfolio has to recover from any short-term fluctuations in the market. + Increased trading volume (RP > RM): Increased trading volume can lead to more volatility in the market, which can increase the risk of the portfolio. However, it can also lead to more liquidity in the market, which can make it easier to sell the portfolio if necessary. The other factors mentioned, high retum portfolios (RP > RF) and high premium portfolios (RP > RM), do not necessarily affect the stability of portfolio risk. A high return portfolio may have a higher beta, but it may also have a higher alpha, which would offset the increase in beta. A high premium portfolio may have a higher beta, but it may also have a lower correlation with the market, which would also offset the increase in beta. Therefore, the correct answer is (B), (C), and (D) & CR ABR heli) JL RR een ae Start Complete Exam Preparation a} een ocd aac MasteClasses (© J Question Bank Extra Download App Question 3: View this Question Online > As per CAPM model, the required rate of return onva’security is: 1. Return on Treasury Bonds + Market Risk/Premitim 2. Return on individual securities + Beta Premium 3. Return on)GOvernment Securities + Unsystematic Risk Premium 4 Az. Corporate Securities + Systematic Risk Premium.FEN ee Se Ee TE A eT Option 1: Return on Treasury Bonds + Market Risk Premium Portfolio Management Question 3 Detailed Solution The correct answer is Return on Treasury Bonds + Market Risk Premium. @ Key Points CAPM MODEL: According to the Capital Asset Pricing Model (CAPM), the required rate of return on@'Security is calculated as the sum of the risk-free rate and the product of the security's beta (systematic risk) and the market risk premium. The formula for calculating the required rate of return (R) on security using CAPM is as follows: R=Rf+B*(Rm-Rf) Where: he risk-free rate of return, usually the yield on government bonds the security's beta, a ah of its systematic risk relative to the overall market + Rm = the expected market fetiikn + (Rm - Rf) = the market ‘isk, m, which is the excess return that investors expect to earn by investing in the market portfolio rather than a risk-free asset. &; Additional Information + The CAPM model suggests that the required rate of return on a security is directly proportional to its systematic risk (beta), and that investors demand a higher return for taking on greater risk. + Therefore, the required rate of return on a security with a higher beta will be higher than that of a security with a lower beta, assuming all other factors remain constant. Hence, the correct answer is Return on Treasury Bonds + Market Risk Premium. CER ABS keri) LR ea ea Start Complete Exam Preparation ris Practice fox} Mock Tests a Question Bank Execs Download App Question 4: View this Question Online > Portfolio approach to investing is primarily focused on which of the following:1. Diversification, 2. Valse iis ction 3. Return appreciation 4. Risk optimisation Answer (Detailed Solution Below) Option 1 : Diversification Portfolio Management Question 4 Detailed Solution The correct answer is Diversification © Key Points + Diversification involy@iigpreading investments across different assets or asset classes (such es stocks, bonds, real ak to reduce risk. + By diversifying a portfoll®Mvestors aim to minimize the impact of any single investment's poor performance on the overall portfolio. + Diversification is a key principle of the portfolio approach to investing, helping investors manage risk and potentially improve their chances of achieving more consistent returns over the long term. & eee aPC peta Pela mew emt le Lael) EDC C DRE ecm lon pc ees Dos ciapey resend Download App Etter Question 5: View this Question Online > Tha farmila far thea Canital Accat Dein BAA GE aT (CADAA) ic1. K)=RF+ bRF- Rm) 2 “ RA 3. KER +bR@-M) 4, K=R+b(R-R) Answer (Detailed Solution Below) Option 2: kj = RF + b(Rm - Rf) Portfolio Management Question 5 Detailed Solution The correct answer is KJ = Rf + b(Rm - Rf). * © Key Points Capital Asset Pricing Model- * It shows the linear relationship between systematic risk, and expected return for assets, particularly equities. + The relationship between an asset's beta, the'risk-free rate (usually the interest rate on Treasury bills), and the cted returnon the market less the risk-free rate, serves as the foundation for the mode + Mathematical formula of this tiodel is Kj = Rf + beta(Rm - Rf). Where, Kj = return on any traded asset, Rf = Rate of return on risk-free assets beta = Relative market risk Rm = average expected rate of return of the asset in the market. Top Portfolio Management MCQ Objective Questions ERE Sen ert Ree ott Start Complete Exam Preparationba eee fore een ‘Question 6 3 View this Question Online > The formula for the Capital Asset Pricing Model (CAPM) is: Rf + biRF= Rm) » b(Rm - Rf) 3. K=R+b(R-M) 4, K=R+bQR-R) Answer (Detailed Solution Below) Option 2: Kj = RF + b(Rm - Rf) Portfolio Management Question 6 Detailed Solution The correct answer is Kj = Rf + b(Rm - Rf). © key Points Capital Asset Pricing Model- * It shows the linear relationship between systematic risk’ and expected return for assets, particularly equities. * + The relationship between an asset's beta’ the Tisk-free rate (usually the interest rate on Treasury bills), and the prajeeted return oh the market less the risk-free rate, serves as the foundation for the no : + Mathematical formula of tt is K] = Rf + beta(Rm - Rf). Where, kj = return on any traded asset, Rf = Rate of return on risk-free assets beta = Relative market risk Rm = average expected rate of return of the asset in the market.CER ARR Reta) Start Complete Exam Preparation CRC Lar ceo Tp food bee aoa esol resieiccag Download App Gam eto Question 7 View this Question Online > As per CAPM model, the required rate of return on a secuitity is: 1. Return on Treasury Bonds + Market Risk Premium 2. Return on individual securities + Beta Premium 3. Return on Government Securities + Unsystematic Risk Premium eRRgon Corporate Securities + Systematic Risk Premium. Answer (Detailed Solution Below) Option 1 : Return on Treasury Bonds + Market Risk Premium Portfolio Management Question 7 Detailed Solution The correct answer is Return on Treasury Bonds + Market Risk Premium. © Key Points CAPM MODEL: According to the Capital Asset Pricing Model (CAPM), the required rate of return on a seatifity is celculated as the sum of the risk-free rate end the product of the security's beta (systematic risk) and the market risk premium, The formula for calculating the required rate of return (R) on security Using CAPM is as follows: R=Rf+B*(Rm-Rf) Where:+ Rf = the risk-free rate of return, usually the Yield on government bonds + B = the security's beta, a 12 ofits systematic risk relative to the overall market + Rm = the expected market Fetity + (Rm - Rf) = the market “isk premium, which is the excess return that investors expect to earn by investing in the market portfolio rather than a risk-free asset. & Additional Information + The CAPM model suggests that the required rate of retum on a security is directly proportional to its systematic risk (beta), and that investors demand a higher return for taking on greater risk. + Therefore, the required rate of return ona security with a higher beta will be higher than that of a security with a lower beta, assuming all other factors remain constant. Hence, the correct answer is Return on Treasury Bonds + Market Risk Premium. India’s #1 Learning Platform Start Complete Exam Preparation (By ideas | UB) Gucnn one |) cqace Download App ORCC conte Question 8 View this Question Online > The following two statements relate to Capital Asset Pricing Model, Choose the correct code for the statements being correct or incorrect. Statement I: Beta is a measure of a security's risk relative to:the risk of the market portfolio. Statement I security. The value of Beta measures both the systemat and the unsystematic risks of a 1, Statement | is correct, but ILis"incorrect. 2. Statement Il isorrect, BUTI is incorrect. =" the statements | and Il are correct. 4, Both the statements | and II are incorrect. Answer (Detailed Solution Below)Option 1: Statement I is correct, but Il is incorrect. Portfolio Management Question 8 Detailed Solution The correct answer is Statement I is correct, but Il is incorrect. © Key Points Statement I: Beta is a measure of a security's risk relative to the risk of the market portfolio. + Beta refers to the measure of risk of a stock relative to the market portfolio. + The beta of a stock indicates how volatile it is in comparison to the entire market. + Individual businesses are rated based on how far they depart from the market, with the S&P 500 Index, for instance, having a beta of 1.0 by definition. A stock that has a beta value above 1.0 will fluctuate more than the market over time. Statement Il: The value of Beta mgacures both the systematic and the unsystematic risks of poet ‘ + Beta does not assess uncystematic risk, which is the risk unique to a single company, but rather simply the systematic risk, which is the risk relating to the entire market or sector. + This is due to the fact that it gauges a security's propensity to move concurrently with the stock market's general return. + A measure of a security's volatility in proportion to market volatility is known as beta. Hence, the correct answer is Statement I is correct, but I India’s #1 Learning Platform Ree Pot Start Complete Exam Preparation pre catia D> Download AppQuestion 9 C oO View this Question Online > a The credit of taking portfolio theory fi ction to reality goes to 1. Harry Markowitz Noe 4. Eugene Fama Answer (Detailed Solution Below) Option 2: William Sharpe Portfolio Management Question 9 Detailed Solution The correct answer is William Sharpe © keyPoints fe) ‘icing + Inthe 1960s, William Sharpe is acknowledged for developing the Capi a model (CAPM). a + The expected returns for a security ar + The risk-free rate, beta, and market risk premium are all consider by Capital Asset Pricing Model in order pillar of portfolio management. + Investors use the Sharpe ratio, one of th investment relative to its risk + The primary premise of the CAPM he optimization of a portfolio's returns in accordance with the risk ce of its owner, + It describes the link betw rice of an asset, its risk, end its projected return. + Formula of CAPM: > R,=R,+ Beta (R,,-Ry) + Here R; = Return on Asset that are e expected return, which is a -d indices, to @8SeSs the return on an Ry = Return on Risk Free Asset Rm = Market Risk Premium Hence, the correct answer is William Sharpe.Pee eae Start Complete Exam Preparation Rea Ss ial Pea ‘i ieee MasterClasses resieacrd Download App Ga et ‘Question 10 View this Question Online > In the absence of covariance among securities in the portfolio, if each security has an average standard deviation of 20%, the portfolio of 100 securities would have a standard deviation of 1. 2% 2. 20% ~ Answer (Detailed Solution Below) Option 1: 2% Portfolio Management Question 10 Detailed Solution The correct answer is 2%. © Key Points Portfolio standard deviation: + The standard deviation of a portfolio measures how much the investment returns deviate from the mean of the probability distribution of investments. Put simply, it tells investors how much the investment will deviate from its expected return, + The formula for portfolio variance in a two-asset portfolio is as follows: * Portfollo variance = w420,? + w7207 + 2w,w2Cov,,2+ Where: + wy = the portfolio weight of the first asset. + wy = the portfolio weight of the second asset. © a= the standard deviation of the first asset *° Gg = the standard deviation of the second asset” ° Cov;.2 = the covariance of the two assets, which can thus be expressed as pq,2)102, where pia) is the correlation coefficient bétween the two assets. ° Here Covy2=0 » Important Points ~a = 10/100 = 10% Weightage of each secur Therefore, portfolio variance = (10742 x 20%” 2) + (10962 x 209692) +annunu100 times =100 x (109% 42 x 20% 2) =100x (0.017x0.04%) The standard devi portfolio variance: ‘ion of the portfolio variance can be calculated as the square root of the Therefore, square root of 0.0004 = 0.02 or = 2% eee en etl CRS rot Slam (CM Cinelli) a acrid mance ies Guestmenk | (88) eouces Download App Question 11: View this Question Online > Portfolio approach to investing is primarily focused on which of the following: 1. Diversification, 2 val gion 3. Return appreciationON Vpn Answer (Detailed Solution Below) Option 1 : Diversification Portfolio Management Question 11 Detailed Solution The correct answer is Diversification © Key Points * Diversification involyagispreading investments across different assets or asset classes (such as stocks, bonds, real S to reduce risk. + By diversifying a portf Jesters aim to minimize the impact of any single investment's poor performance on the overall portfolio. + Diversification is a key principle of the portfolio approach to investing, helping investors manage risk and potentially improve their chances of achieving more consistent returns over the long term. ee Pe SPE Berle) Start Complete Exam Preparation CR eee cr (8) ) Dally Live ee Tac MasterCl resus EX otiea Download App Question 12: View this Question Online > The formula for the Capital Asset Pricing Model (CAPM) is: Rf + b(Rf- Rm) RF+ b(Rm 2 RA A... 4, K=R+bQR-R)Answer (Detailed Solution Below) Option 2: Kj = RF + b(Rm- Rf) Portfolio Management Question 12 Detailed Solution The correct answer is Kj = Rf + b(Rm - Rf). © Key Points Capital Asset Pricing Model- * It shows the linear relationship between systematic risk, and expected retum for assets, particularly equities. * The relationship between an asset's beta) the risk-free rate (usually the interest rate on Treasury bills), and the pri ted return.on the market less the risk-free rate, serves as the foundation for the m + Mathematical formula of ‘odel is Kj = Rf + beta(Rm - Rf). Where, Kj = return on any traded asset, Rf = Rate of return on risk-free assets beta = Relative market risk Rm = average expected rate of return of the asset in the market. SER ABR Rell Start Complete Exam Preparation Calm ce ott raya oe PaaS aa Cold ‘Question Bank aa ete Download AppQuest mn 13: \ > a View this Question On ‘0 The ‘Co jodel (CAPM) establishes the relationship between and Value of the firm. Risk and EPS. 3. Risk and average rate of return. 4. Riskand the required rate of return. Answer (Detailed Solution Below) Option 3 : Risk and average rate of return. Portfolio Management Question 13 Detailed Solution The correct answer is Risk and average rate of return O The Capital Asset Pricing Model (CAPM) establishes the relationship betwee! ts + Expected return on an asset: This refers to the average return an in ects to earn over the long term by holding an asset, considering both dividend capital apprecation. + systematic risk (market risk): This is the portion of cannot be diversified away through portfolio diversification. Itreflects th ity of the market and affects all assets to some degree. CAPM essentially predicts that the expected its systematic risk. In other words ith higher returns to compensate inv levels of market risk should, on average, offer ditional volatility they are taking on. Here's the core formula of CAP! Expected return on asset = Risk-free rate + Beta * (Market expected return - Risk-free rate) + Risk-free rate: This represents the return on an investment with no risk, such as government bonds + Beta: This is a measure of an asset's systematic risk, indicating its volatility relative to the overall market. A beta of 1 means the asset moves in line with the market, while a beta greater than 1 indicates higher volatility, and a beta less than 1 indicates lower volatility. + Market expected return: This is the average return investors expect from the overall market. Therefore, CAPM provides a framework for investors to estimate the expected return on an asset based on its market risk and compare it to its current market price to make informed investment decisionsIndia’s #1 Learning Platform Start Complete Exam Preparation Ree Dar cect lee [jg] Practice es Dosey Cres ieac og Download App Exotic) Question 14: View this Question Online > CAPM accounts for : 4. Systematic risk 2. Unsystematic risk 3. 3 4. None of the above Answer (Detailed Solution Below) Option 1 : Systematic risk Portfolio Management Question 14 Detailed Solution The correct answer is Systematic risk. 6 Key Points The Capital Asset Pricing Model (CAPM) accounts for systematic risk, not unsystematic risk. Here's why: + Systematic risk: This refers to the risk inherent to the’éntire market or market segment, such as economic recessions, interest rate fluctUations, and political instability. It cannot be diversified away through portfolio diversification. + Unsystematic risk: This 10 the risk'Specific to a company or industry, such as a product recall, a natural disaster, nange in management. it can be mitigated through diversification by investing) riety of companies or industries. + CAPM focuses on the relationship between a security's expected return and its systematic risk, measured by its beta. The beta of a security indicates its sensitivity to market movements. ASee RR ee aR TN Te AE ee mene Te A beta of 2 indicates that the security's return is expected ta be twice as volatile as the market. Se sae NT ER en Therefore, since CAPM is concerned with pricing risky assets based on their systematic risk, it does not account for unsystematic risk, which can be diversified and therefore does not affect the overall expected return of a diversified portfolio. eee Eero Cee Dart PS Ela me (Cw cui me le Laced) Caan ened Prac oes cole restau gd Extra) Download App Question 15: View this Question Online > Contrast to individual stocks, stability of Portfolio Risk (B) dramatically increases with A. High return portfolios (Rp > Rx) B. Larger portfolios (np > 50) C. Longer investment duration (ty > 26 weeks) D. Increased trading volume (R8> Ry) E. High premium portfolios (Rp > Ru) Choose the correct answer from the options given below: a 1. A, Band C only 2. B, Cand Donly 3. C, Dand Eonly 4. A,Dand Eonly Answer (Detailed Solution Below)Option 2: B, C and D only Portfolio Management Question 15 Detailed Solution cO The correct answer is B, C and D only. @ Key Points oo The correct answer is (B), (C), and (D). The stability of portfolio risk (B) increases with the foll ors: + Number of assets in the portfolio (np) mber of assets in the portfolio increases, the individual risks of the assets partfolio tend to cancel each other out, resulting in a more stable portfolio. A portfoli e than 50 assets is considered to be large enough to achieve this effect. + Length of investment duration (tp): The longer the investment duration, the more time the portfolio has to recover from any short-term fluctuations in the market. + Increased trading volume (RP > RM): Increased trading volume can lead to more volatility in the market, which can increase the risk of the portfolio. However, it can also lead to more liquidity in the market, which can make it easier to sell the portfolio if necessary. The other factors mentioned, high return portfolios (RP > RF) and high premium portfolios (RP > RM), do not necessarily affect the stability of portfolio risk. A high return portfolio may have a higher beta, but it may also have a higher alpha, which would offset the increase in beta. A high premium portfolio may have a higher beta, but it may also have a lower correlation with the market, which would also offset the increase in beta. Therefore, the correct answer is (B), (C), and (D)