Portfolio Management MCQ - Portfolio Management Section 1

31 Which of the following combinations is most likely to have its portfolio’s risk and return presented in the form of the capital market line, CML?

The capital market line, CML, is a special case of the capital allocation line, CAL, which includes possible combinations of a risk-free asset and the market portfolio.

32 Any point above the capital market line is most likely to be considered:

Any point above the CML is not achievable, whereas any point below the CML is inferior to any point on the CML.

33 XYZ is a portfolio on the capital market line. The returns on the market portfolio are greater than the returns on the portfolio XYZ. XYZ is most likely to be:

Since the XYZ portfolio return is less than the market return, this implies that XYZ is a combination of the risk-free asset and the market portfolio. Owning the risk-free asset is essentially lending to the government. Thus, XYZ is a lending portfolio.

34 In defining the CML, we assume that all investors have the same expectations for securities. This results in:

The CML assumes that all investors have the same expectations for securities that result in an optimal risky portfolio i.e. the market portfolio.

35 Which of the following assumptions of the capital market theory allows for optimal risky portfolio i.e. market portfolio to exist?

Investors with homogenous expectations are rational and use the same probability distributions, same inputs for cash flows, and thus arrive at same valuations. Thus they will generate same optimal risky portfolio, i.e. the market portfolio.