1 Capital market fine (CML) represents return vs risk im Sharpe index and Treynor index measure retums on a (standard deviation) on an efficient set of risky securities Portfolio with respect to standard deviation (a) and beta and a risk-free security factor (), respectively. t= Security market line (SML) represents relationship be- _m Jensen index measures actual return on a portfolio with tween the expected rate of retum of an asset with its beta expected return on the portfolio for a given risk value f= Bota (B) of an asset is a measure of systematic risk and '= Capital asset pricing model (CAPM) isa framework for itis the ratio of covariance between asset return and valuation of risky securities. Arbitrage pricing theory market return to variance of market returns. (APT) isanother method for valuation of risky securities. m_ Beta of an asset is affected by firm's nature of business, its operating leverage and financial leverage. Exercises Objective Type Questions (b)_Unsystematic risk State whether the following statements are True (T) or a Heo, (@) Total risk Tried or conts usa nierchangesly 8 Reon betwen systematic rs and etm is ZACARM ares teed cent (a) Copla sset ping model 3, Systematic risk does not change, nrespective of any © Mintiage piling Bests numberof securities in the portfolio Oy CalErcies 4. tficient frontier comprises many efficient port cousins 5. Security market line represents market prices of securi- ties. Multiple Choice Questions 6, Systematic risk and return is described by, (a) Characteristic tine (a) None of the above 9. Systemati risk of a security is measured by, (@) Standard deviation (b) Beta (6) Coefficient of variation (@) None of the above () Capital market tine 10. Portfolio risk depends upon, (€) Security market line (a) Risk of individual assets (@) None of the above (b) Proportion of individual asset 7. Risk which can be reduced through diversification is, (©) Correlation of return (a) Systematic risk (@) All the above Question 1 2 3 4 5 6 7 5 9 10 Answer F r T T F € b a > 4 ‘Questions for Discussion 7. What is beta (8) and how it is measured? Explain the caps difficulties associated with estimation of B. 1 Explain the ‘capital asset pricing mode! (CAPM). Describe how cost of equity is calculated using CAPM. Enumerate its assumptions and implications. 2. Explain the concepts of security market line (SML) and ‘capital market line (CML), Illustrate each with simple ‘example and draw the graph, 3, Describe what you understand by portfolio. Explain the process of calculating return and risk of a tworasset portfolio. 4. Describe portfolio theory. Explain the assumptions of portfolio theory. 5. Describe the arbitrage pricing theory (APT). Explain the concepts of risk and return under APT. 6. What is the meaning of diversification inthe context of Fisk of investment in portfolio of securities? rv approach, 9, Explain the concept of systematic risk and unsystematic risk, Describe how these two types of risk can be reduced. 10, What is the principle of dominance? Explain what is ‘meant by efficient portfolio and efficient frontier ‘Numerical Problems 1. Mr. Ashutosh has selected two securities, A und B for investment, The fate of Fetus on the «wo secur ‘and associated probabilities under varying economic conditions are given, as follows: Risk and Return: Portfolio Theory and Assets Pricing Models 5.25