Question

activity #4
multiple choice questions (20 items)

1. the key innovation that transformed markowitzs portfolio theory into capital market theory was the introduction of:

a. the assumption of homogeneous expectations
b. the concept of a risk - free asset
c. the assumption of identical time horizons
d. the assumption of no inflation

1. according to capital market theory, the rate at which investors can both borrow and lend without risk is known as:

a. market return rate
b. expected return rate
c. risk - free rate
d. capital allocation rate

1. in the context of capital market theory, \homogeneous expectations\ mean that:

a. investors share identical risk preferences
b. investors have identical forecasts about future returns and risks
c. investors all prefer short - term investments
d. investors all hold the same portfolio of risky assets

1. which of the following assumptions is not part of capital market theory?

a. all investors are risk - averse
b. investors can borrow at different interest rates
c. all investors share a single time horizon
d. there are no taxes or transaction costs

Explanation:

1. Markowitz's portfolio theory was transformed into Capital Market Theory by introducing the concept of a risk - free asset. This allowed for the separation of the risky asset portfolio selection (based on Markowitz's work) from the risk - return trade - off decision (by combining with the risk - free asset).
2. In Capital Market Theory, the rate at which investors can borrow and lend without risk is the risk - free rate. This is a fundamental concept as it forms the basis for the Capital Market Line (CML) and the Security Market Line (SML).
3. Homogeneous expectations in Capital Market Theory mean that investors have identical forecasts about future returns and risks. This assumption simplifies the analysis as it implies that all investors will arrive at the same optimal risky asset portfolio.
4. One of the assumptions of Capital Market Theory is that investors can borrow and lend at the same rate (the risk - free rate). So, the assumption that investors can borrow at different interest rates is not part of Capital Market Theory.

Answer:

1. B. The concept of a risk - free asset
2. C. Risk - free rate
3. B. Investors have identical forecasts about future returns and risks
4. B. Investors can borrow at different interest rates