Page 299 - DCOM504_SECURITY_ANALYSIS_AND_PORTFOLIO_MANAGEMENT

Security Analysis and Portfolio Management

Notes 11.13 Keywords

Arbitrage: The practice of taking advantage of a state of imbalance between two (or possibly
more) markets and thereby making a risk-free profit, Rational Pricing.

Beta: The measure of asset sensitivity to a movement in the overall market.
CAPM: A model that explains relative security prices in terms of a security's contribution to the
risk of the whole portfolio, not its individual standard deviation.

Security Characteristic Line (SCL): It represents the relationship between the market return (r )
M
and the return of a given asset i(r ) at a given time t.
i
11.14 Self Assessment

Fill in the blanks:

1. A more risky stock will have a .................... beta and will be discounted at a ....................
rate.
2. CAPM is the abbreviation of ....................

3. The CAPM is a theoretical solution to the identity of the .................... portfolio.
4. The .................... expresses the basic theme of the CAPM.
5. A line that best fits the points representing the returns on the assets and the market is
called ....................
6. Systematic risks within one market can be managed through a strategy of creating a
.................... portfolio.

7. The slope of the characteristic line shows the relationship of an individual security with
the ....................
8. The alpha coefficient (a) gives the .................... intercept point of the regression line.

9. Whereas the CAPM is a .................... model, the APM is a .................... model instead of just
a single beta value.
10. The .................... sells the asset that is relatively too expensive and uses the proceeds to buy
one which is relatively too cheap.
11. Portfolio management is concerned with efficient management of .................... in the
securities.
12. The optimal investment achieved at a point where the indifference curve is at a tangent to
the ....................
13. A .................... investor would not invest in an asset that does not improve the risk-return
characteristics of his existing portfolio.

14. The .................... coefficient gives the vertical intercept point of the regression line.
15. The APT differs from the CAPM in that it is .................... in its assumptions.

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