An Introduction to Asset Pricing Models
a. List the assumptions of the capital market theory.
b. Explain what happens to the expected return, the standard deviation of returns, and possible risk-return combinations when a risk-free asset is combined with a portfolio of risky assets.
c. Identify the market portfolio and describe the role of the market portfolio in the formation of the capital market line (CML).
d. Define systematic and unsystematic risk and explain why an investor should not expect to receive additional return for assuming unsystematic risk.
e. Describe the
f. Calculate and interpret using the SML, the expected return on a security and evaluate whether the security is undervalued, overvalued, or properly valued.
g. Explain how the systematic risk of an asset is estimated using the characteristic line.
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