Discuss the similarities and differences between the CML and SML as models of the risk-return tradeoff. Is one model better than the other when evaluating a well-diversified portfolio? Explain. | Homework.Study.com (2024)

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• What are the similarities and differences between the CML and SML as models of the risk-return trade-off?
• Explain the differences between stand-alone risk, diversifiable risk, and portfolio risk.
• Explain how differences in allocations between the risk-free security and the market portfolio can determine the level of market risk.
• Describe what portfolio diversification is and explain why it works to reduce risk.
• Discuss how diversification affects risk and how correlation between securities affects portfolio risk.
• A) Explain the difference between pure risk and speculative risk. B) How does diversifiable risk differ from non-diversifiable risk?
• Compare and contrast the dividend discount model to the capital asset pricing model. Discuss the strengths and weaknesses of each model.
• Explain how diversification can reduce the risk of a portfolio of assets to below the weighted average of the risk of the individual assets. Explain with numerical example.
• Can you explain how and why the diversification reduces the portfolio risk?
• Explain the difference between systematic risk and un-systemic risk. Can a financial professional ever rid a portfolio of systematic risk?
• 1. Describe the typical relation between portfolio risk and number of stocks held. 2. Describe the role of correlation in determining portfolio risk. 3. Describe how the efficient frontier and the c
• Describe the differences between APV valuation and WACC based DCF valuation? Describe, briefly, advantages and disadvantages of the alternative models.
• A) What is the difference between a diversifiable risk and a non-diversifiable risk? B) Should stock portfolio managers try to eliminate both types of risk?
• Discuss the advantages and disadvantages of models used to assess risk exposure. Which of the disadvantages might be the most problematic?
• Describe what happens to portfolio risk as more and more assets are added to a portfolio. Are there advantages to international diversification?
• How does the risk of portfolio of assets differ from the risk of single asset?
• Discuss the nature of the numerators and denominators in the dividend discount model and the free cash flow valuation model. What makes these approaches similar; what makes these different? Explain wh
• Evaluate the potential gains and losses for forwards, futures, call options, put options, and swaps. Outline and describe the different risks that each type of derivative contract faces. Describe diff
• Explain the advantages and disadvantages of implementing portfolio insurance using stock and puts in comparison to using stock and futures in a dynamic hedge strategy?
• Explain the conceptual differences in the theoretical development of the CAPM and APT. Under what circ*mstances do they appear identical?
• Assume that you are looking to invest in a bond (i.e. you are the bondholder.) What kind of risks do you need to evaluate before investing? Explain the following different types of risk: (1) price risk, (2) reinvestment risk, (3) default risk, and how eac
• Discuss a scenario in which the CAPM and APT models would lead to contradicting conclusions regarding the selection of stocks for your portfolio. How would you address the contradiction: would you pre
• 1. Describe the various types of risk to which investors are exposed. 2. What is meant by the risk return trade-off? What is the risk-free rate of return? 3. Briefly describe the two basic sources o
• What are differences between "market risk modeller" and "quantitative analyst" in financial companies like Goldman Sachs?
• Discuss the nature of the numerators and denominators in the dividend discount model and the free cash flow valuation model. What makes these approaches similar; what makes these different? Explain why the term consistency is important in the application
• Describe the underlying assumptions and differences for the Capital Asset Pricing Model (CAPM) and the Arbitrage Pricing Theory (APT). Provide an example in which type of situation each would be most
• Discuss how certain features (characteristics) of bonds affect their risk and hence return. Also discuss the usefulness and limitations of bonds ratings. How would these factors change your investment
• Explain the difference in how risk is assessed under the shareholder wealth maximization vs stakeholder capitalism model.
• a) How does the liability maturity structure of a bank's balance sheet compare with the maturity structure of the asset portfolio? b) What risks are created or intensified by these differences?
• How can multifactor models be used to help investors understand the relative risk exposures in their portfolios relative to a benchmark portfolio? Support the answer with examples using both macroecon
• Compare long-term instruments and short-term risks, in terms of the various types of risk to which investors are exposed. Explain.
• a) Compare and contrast the two methods of modeling prepayment (constant CPR and PSA). b) What are the advantages and drawbacks of each method?
• How does the liability maturity structure of a bank's balance sheet compare with the maturity structure of the asset portfolio? What risks are created or intensified by these differences?
• Compare and contrast the underlying concepts for the following: a. Free cash flow (DCF) model. b. Market multiples (comparable)
• An equity-indexed annuity and a variable annuity are both similar and different in many respects. Explain the major similarities between an equity indexed annuity and a variable annuity and identify
• Briefly explain why bonds of different maturities have different yields in terms of the expectations and liquidity preference hypotheses. Briefly describe the implications of each hypothesis when the yield curve is upward-sloping; downward-sloping. An ins
• Based on your understanding of the CAPM and the SML, which of these asset(s) or portfolio(s) would you invest in and which would you not invest in. Explain your choice.
• Can you explain why diversification lowers risk?
• Discuss the similarities and differences in managing a portfolio of equity investments and credit assets.
• Describe how a linear discriminant analysis model works. Identify and discuss the criticisms which have been made regarding the use of this type of model to make credit risk evaluations.
• According to the CAPM (capital asset pricing model), what is the single factor that explains differences in returns across securities?
• Think of two investment opportunities and compare them to each other. Give a brief outline of what they are, how they work, and what kind of results can be expected from them. Also go over the risks a
• What is an easy way of understanding the difference between Value-at-Risk (VaR) and Conditional-Value-at-Risk (CVaR) of a portfolio?
• Describe how an investor may combine a risk-free asset and one risky asset in order to obtain the optimal portfolio for that investor.
• Explain the risks of the interest rate swap position and should it be hedged in this scenario? What impact might it have on the rest of the portfolio?
• 1. Describe the difference between a price momentum strategy and an earnings momentum strategy. Under what conditions would you expect the two approaches to produce similar portfolios? 2. What are the
• Describe the difference between a price momentum strategy and an earnings momentum strategy. Under what conditions would you expect the two approaches to produce similar portfolios?
• In the scenario below, identify 4 different Enterprise Risks that you would face if you went through with the transaction. Explain how each risk is involved and how you might mitigate or lower that specific risk. You have the opportunity to buy 2 millio
• 1. Discuss three factors that cause U.S. investors to consider including various global securities in their portfolios. 2. Discuss why international diversification reduces portfolio risk. Specifical
• What security characteristics are most important in the determination of the variance of a well-diversified portfolio?
• a) What is the difference between portfolio risk and stand-alone risk? b) What is the relevance of each to an investor (or, is each relevant?)? c) As an investor, how do you consider each in making investment decisions?
• Discuss briefly. 1. In your own words contrast the strengths and weaknesses of each capital budget decision model compared against the NPV model. 2. Given the Net Present Value (NPV) method of capit
• Explain, and graphically depict, how Security Market Line (SML) is different from Capital Market Line (CML). Identify and discuss the importance of minimum variance portfolios. Why might the CAPM equa
• Identify the fundamental distinction between a futures contract and an option on a futures contract; and explain the difference in the manner that futures and options modify portfolio risk.
• Identify sources of risk and contrast them (include examples) and explain why investors should be concerned with them.
• Discuss why growth rate models are practical and convenient ways to look at stock valuation. Compare and contrast the nature of cash flows, stemming from an investment in stock, with those coming from
• Explain the differences between call and put options. Are they just the exact opposites of each other? Explain the differences between long and short in the stock market. Explain how one shorts a st
• Describe the maturity matching principle and explain the risks of not matching maturities.
• Distinguish and explain the differences between business and financial risk and provide an example from a publicly traded company. Use specific examples and citations to support your assertion for business or financial risk.
• Why is the correlation between asset returns important? How does diversification allow risky assets to be combined so that the risk of the portfolio is less than the risk of the individual assets in it?
• Analyze and discuss the usefulness of financial modeling, in determining the relative value of options. Give three specific examples of how a bank can use this method, both for risk management and spe
• 1. Distinguish between savings and investing. 2. Discuss the importance of ethics when working with financial planning professions. 3. Explain the concept of return on investment. 4. Explain risk vs.
• Explain the characteristics of common stock that differentiate the security from other types of financial securities.
• 1. What is the difference between real and financial assets? 2. Explain the differences between market risk, credit risk, liquidity risk, and operational risk.
• What is the Jensen portfolio performance measure and how can it be adapted to include multifactor models of risk and expected return?
• Determine the three types of risk that are relevant in capital budgeting. How is each of these risk types measured, and how do they relate to one another?
• Compare and contrast how different types of financial instruments, such as stocks, bonds, mutual funds, and commodities, respond to different macroeconomic environments, analyzing how that might affect a company's IPO success. For example, are investors m
• a) Compare and contrast two types of leases and describe the advantages and disadvantages of each. b) Which type of lease would produce the lowest risk?
• How can we revise the FCF model by using market comparables and multiples to make it hit corporate targets we might have? For example, we might want to see what assumptions might justify the market's
• Are hedging with forwards and futures contracts the same, or are there different risks to be considered when using these two contracts? Explain your answer.
• 1. Explain the difference between the risk-neutral and actual probabilities. 2. In which states is one higher than the other? Why? 3. Explain why risk-neutral probabilities can be used to price deri
• A) How does hedging differ from insurance? B) Why does hedging create value only if the firm's cost structure is convex in the hedgeable risk? C) Explain whether financial risk management allows a bet
• What is diversification? How does it reduce the risk of a financial portfolio?
• Describe the basic procedures involved in using risk-adjusted discount rates (RADRs). How is this approach related to the capital asset pricing model (CAPM)?
• Compare and contrast between RAPM and RAROC. Why are RAPM and RAROC important and how are they used in a risk management system?
• What is the main difference between firm-specific and systemic credit risk? a. Firm-specific risk can be managed by proper underwriting and diversification in a loan portfolio. b. Systemic risk affects all borrowers. c. Firm-specific risk is determined
• Describe how risk and profitability factors cause differences in price-earnings ratios across firms. Explain the difference between abnormal and normal earnings.
• Compare and contrast the Black-Litterman with the mechanical portfolio approach to portfolio optimization, considering its emphasis on Bayesian statistics. In your analysis, review the value of the ma
• Suppose we have two assets, A and B. What correlation levels between the two assets will yield diversification benefits in terms of portfolio risk reduction? At what correlation level will there be no
• For trading in financial markets, what are the pros and cons of diversification, compared to hedging, as risk management techniques?
• What is the arbitrage pricing theory (APT) and what are its similarities and differences relative to the CAPM?
• How does the theory of portfolio risk relate to enterprise risk management?
• Given the same set of stocks, explain why two fund managers may obtain different optimal risky portfolios.
• What are exchange markets and OTC markets? What is the structure and function of each of these types of markets? How do these markets compare/contrast with respect to issues such as counter-party risk, form of contract (e.g., futures vs. forwards), and re
• What is the difference between scenario analysis and sensitivity analysis in financial risk modeling?
• In the scenario below, identify 4 different Enterprise Risks that you would face if you went through with the transaction. Explain how each risk is involved and how you might mitigate or lower that specific risk. You have the opportunity to buy 2 million
• What are the advantages of the APT model relative to the CAPM?
• How is risk defined in the shareholder wealth maximization model compared to the corporate wealth maximization model?
• Explain the difference between business risk and financial risk.
• What are the differences between credit risk, market risk, and operational risk?
• 1. What are the primary variables that influence the risk of a portfolio of assets? 2. Distinguish between unsystematic and systematic risk. Under what circ*mstances are investors likely to ignore th
• Compare and contrast the two categories of bonds and how they differ from mortgage-backed securities and the collateral pledged for each.
• Why does portfolio diversification usually help financial managers to reduce risk?
• Why are safety and risk, two sides of the same coin? In your own words, describe each of the four components of the risk factor. How do income, growth, and liquidity affect the choice of an investment
• Explain different option valuation methods. Use the different valuation methods to value a specific option. Differentiate the intrinsic and extrinsic valuations of the option and explain how they eval
• Compare and contrast the gain and loss potential for investors holding the following positions: long forward, short forward, long call, short call, long put, and short put. Indicate what the terms symmetric and asymmetric mean in this context.
• What is the arbitrage pricing theory (APT) and how is it similar and different from the Capital Asset Pricing Model (CAPM)?
• What are the different types of debt funds, their investment modes, analysis, and pros and cons for investors based on the market or economic risk?
• Discuss diversification among mutual funds. Describe some strategies that make diversification more effective. What is a mutual fund supermarket?