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Question 17.12: What is the theoretical problem inherent in verifying the CA...

What is the theoretical problem inherent in verifying the CAPM empirically?

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The CAPM cannot be tested unless we specify the correct market portfolio, which is the value-weighted portfolio of all risky assets.

Related Answered Questions

Suppose the risk-free asset’s rate of return is 2% and you forecast a return on the market portfolio of 8%. If the beta for some asset x is 1.2, what is the expected return on asset x?

Verified Answer:
E\left(R_{i}\right)=R_{f}+\beta_{i}\left(E\...

Indicate why you agree or disagree with the following statements: a. “As a percentage of the total risk, the unsystematic risk of a diversified portfolio is greater than that of an individual asset.” b. “An investor should be compensated for accepting unsystematic risk.”

Verified Answer:
a. Disagree: Unsystematic risk is nearly eliminate...

“In the CAPM, investors should be compensated for accepting systematic risk; for the APT model, investors are rewarded for accepting both systematic risk and unsystematic risk.” Do you agree with this statement?

Verified Answer:
Disagree. As with the CAPM, investors are not comp...

What are the difficulties of applying the arbitrage pricing theory model in practice?

Verified Answer:
The APT factors are unknown, and therefore cannot ...

What are the advantages of the APT model relative to the CAPM?

Verified Answer:
The APT is more general because it allows for the ...

What are the fundamental principles underlying the APT model?

Verified Answer:
The fundamental principles of the APT model are th...

What is meant by the law of one price, and what does it imply about a package of securities and a given security that have the same payoff?

Verified Answer:
The law of one price implies that assets that have...

What is meant by the “homogeneous assumption” in the CAPM?

Verified Answer:
The homogeneous assumption in the CAPM is the assu...

Why is the CAPM’s assumption that investors can borrow and lend at the risk-free rate questionable?

Verified Answer:
The assumption regarding borrowing and lending at ...

How should an investor construct an efficient portfolio in the presence of a risk-free asset?

Verified Answer:
An efficient portfolio in the presence of a risk f...