{"id":47032,"date":"2024-04-15T22:20:58","date_gmt":"2024-04-15T22:20:58","guid":{"rendered":"https:\/\/exam.pscnotes.com\/mcq\/?p=47032"},"modified":"2024-04-15T22:20:58","modified_gmt":"2024-04-15T22:20:58","slug":"formula-written-as-market-risk-premium-divided-by-standard-deviations-of-returns-on-market-portfolio-is-used-to-calculate","status":"publish","type":"post","link":"https:\/\/exam.pscnotes.com\/mcq\/formula-written-as-market-risk-premium-divided-by-standard-deviations-of-returns-on-market-portfolio-is-used-to-calculate\/","title":{"rendered":"Formula written as market risk premium divided by standard deviations of returns on market portfolio is used to calculate"},"content":{"rendered":"<p>[amp_mcq option1=&#8221;capital market line&#8221; option2=&#8221;security market line&#8221; option3=&#8221;fixed market line&#8221; option4=&#8221;variable market line&#8221; correct=&#8221;option1&#8243;]<!--more--><\/p>\n<p>The correct answer is: A. capital market line.<\/p>\n<p>The capital market line (CML) is a line that shows the relationship between risk and return for a portfolio of risky assets. The CML is constructed by plotting the expected return and standard deviation of returns for all possible portfolios of risky assets. The slope of the CML is equal to the market risk premium, which is the additional return that investors expect to earn for bearing market risk.<\/p>\n<p>The formula for the CML is:<\/p>\n<p>$E(r_p) = r_f + \\beta_p(E(r_m) &#8211; r_f)$<\/p>\n<p>where:<\/p>\n<ul>\n<li>$E(r_p)$ is the expected return on portfolio $p$<\/li>\n<li>$r_f$ is the risk-free rate of return<\/li>\n<li>$\\beta_p$ is the beta of portfolio $p$<\/li>\n<li>$E(r_m)$ is the expected return on the market portfolio<\/li>\n<\/ul>\n<p>The beta of a portfolio is a measure of its systematic risk, which is the risk that cannot be diversified away. The higher the beta of a portfolio, the more sensitive its returns are to changes in the market.<\/p>\n<p>The CML can be used to calculate the expected return and standard deviation of returns for any portfolio of risky assets. To do this, you would first need to estimate the beta of the portfolio. You can then use the CML to calculate the expected return and standard deviation of returns for the portfolio.<\/p>\n<p>The CML is a useful tool for investors who are trying to construct a portfolio that meets their risk and return objectives. By understanding the CML, investors can make informed decisions about how to allocate their assets.<\/p>\n<p>The other options are incorrect because they do not accurately describe the formula that is used to calculate the CML.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>[amp_mcq option1=&#8221;capital market line&#8221; option2=&#8221;security market line&#8221; option3=&#8221;fixed market line&#8221; option4=&#8221;variable market line&#8221; correct=&#8221;option1&#8243;]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[945],"tags":[],"class_list":["post-47032","post","type-post","status-publish","format-standard","hentry","category-financial-management","no-featured-image-padding"],"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v22.2 (Yoast SEO v23.3) - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Formula written as market risk premium divided by standard deviations of returns on market portfolio is used to calculate<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/exam.pscnotes.com\/mcq\/formula-written-as-market-risk-premium-divided-by-standard-deviations-of-returns-on-market-portfolio-is-used-to-calculate\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Formula written as market risk premium divided by standard deviations of returns on market portfolio is used to calculate\" \/>\n<meta property=\"og:description\" content=\"[amp_mcq option1=&#8221;capital market line&#8221; 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