Last updated: 17/08/2025 11:02
The questions are based on or inspired by the following references:
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📘 Part 1 (until Midterm)
Answer the following questions based on the discussions in class.
Q1.
Explain the concept of the efficient frontier and describe how adding more assets to a portfolio can change its risk and return characteristics. Use an example of assets with different correlations to illustrate your answer.
Q2.
Define covariance and correlation in the context of finance. Discuss how these measures influence the variance of a portfolio and explain why diversification can reduce unsystematic risk.
Q3.
Describe the tangent portfolio and the Capital Market Line (CML). How does combining a risky portfolio with a risk‑free asset allow investors to achieve different levels of risk and return?
Q4.
Define the Sharpe ratio and explain how it is used to evaluate the performance of a portfolio. Discuss how changes in the risk‑free rate affect the slope of the Capital Market Line and the interpretation of the Sharpe ratio.
Q5.
List the main assumptions of the Capital Asset Pricing Model (CAPM). Then explain how the Security Market Line illustrates the linear relationship between a security’s beta and its expected return, and discuss the implications of this relationship for asset valuation.