{"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>\r\n    <!-- Check if it's an AMP page -->\r\n            <!-- Non-AMP version -->\r\n        <div class=\"mcq-container\" data-quiz-id=\"quizState_6a971db551e2c\">\r\n                                            <div class=\"option\" data-option-key=\"option1\" data-is-correct=\"true\">\r\n                    capital market line                <\/div>\r\n                                            <div class=\"option\" data-option-key=\"option2\" data-is-correct=\"false\">\r\n                    security market line                <\/div>\r\n                                            <div class=\"option\" data-option-key=\"option3\" data-is-correct=\"false\">\r\n                    fixed market line                <\/div>\r\n                                            <div class=\"option\" data-option-key=\"option4\" data-is-correct=\"false\">\r\n                    variable market line                <\/div>\r\n                            \r\n            <!-- Feedback messages for non-AMP -->\r\n            <div class=\"feedback\" data-feedback=\"wrong\">Answer is Right!<\/div>\r\n            <div class=\"feedback\" data-feedback=\"right\">Answer is Wrong!<\/div>\r\n        <\/div>\r\n\r\n        <script>\r\n        document.addEventListener('DOMContentLoaded', function () {\r\n            var containers = document.querySelectorAll('.mcq-container');\r\n\r\n            containers.forEach(function(container) {\r\n                var options = container.querySelectorAll('.option');\r\n                var feedbackSelect = container.querySelector('[data-feedback=\"select\"]');\r\n                var feedbackWrong = container.querySelector('[data-feedback=\"wrong\"]');\r\n                var feedbackRight = container.querySelector('[data-feedback=\"right\"]');\r\n\r\n                options.forEach(function(option) {\r\n                    option.addEventListener('click', function() {\r\n                        var selectedOption = option.getAttribute('data-option-key');\r\n                        var isCorrect = option.getAttribute('data-is-correct') === 'true';\r\n\r\n                        \/\/ Remove previous selections\r\n                        options.forEach(function(opt) {\r\n                            opt.classList.remove('correct', 'incorrect');\r\n                        });\r\n\r\n                        \/\/ Add the correct\/incorrect class\r\n                        if (isCorrect) {\r\n                            option.classList.add('correct');\r\n                            feedbackRight.hidden = false;\r\n                            feedbackWrong.hidden = true;\r\n                        } else {\r\n                            option.classList.add('incorrect');\r\n                            feedbackRight.hidden = true;\r\n                            feedbackWrong.hidden = false;\r\n                        }\r\n\r\n                        \/\/ Hide select feedback\r\n                        feedbackSelect.hidden = true;\r\n                    });\r\n                });\r\n            });\r\n        });\r\n        <\/script>\r\n    \r\n    <!--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 <div class=\"youtube-subscribe-container\">\r\n        <a href=\"https:\/\/www.youtube.com\/channel\/UCNHT8lW-JmLC68rjBfZhdkg?sub_confirmation=1\" target=\"_blank\" class=\"youtube-subscribe-button\">\r\n            <span class=\"youtube-icon\">\r\n                <svg xmlns=\"http:\/\/www.w3.org\/2000\/svg\" viewBox=\"0 0 576 512\">\r\n                    <path d=\"M549.7 124.1c-6.3-23.7-24.8-42.3-48.3-48.6C458.8 64 288 64 288 64S117.2 64 74.6 75.5c-23.5 6.3-42 24.9-48.3 48.6-11.4 42.9-11.4 132.3-11.4 132.3s0 89.4 11.4 132.3c6.3 23.7 24.8 41.5 48.3 47.8C117.2 448 288 448 288 448s170.8 0 213.4-11.5c23.5-6.3 42-24.2 48.3-47.8 11.4-42.9 11.4-132.3 11.4-132.3s0-89.4-11.4-132.3zm-317.5 213.5V175.2l142.7 81.2-142.7 81.2z\"\/>\r\n                <\/svg>\r\n            <\/span>\r\n            Subscribe on YouTube\r\n        <\/a>\r\n    <\/div> 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 <div class=\"telegram-channel-container\">\r\n        <a href=\"https:\/\/t.me\/pscnotes2025\" target=\"_blank\" class=\"telegram-channel-button\">\r\n            <span class=\"telegram-icon\">\r\n                <svg xmlns=\"http:\/\/www.w3.org\/2000\/svg\" viewBox=\"0 0 496 512\">\r\n                    <path fill=\"white\" d=\"M248,8C111,8,0,119,0,256s111,248,248,248s248-111,248-248S385,8,248,8z M362,177L320,367c-3,14-10,18-20,14l-56-41l-27,26 c-3,3-5,5-10,5l4-63L323,196c5-5-1-7-8-3l-98,62l-42-13c-9-3-10-9,2-14l162-63C351,160,365,164,362,177z\"\/>\r\n                <\/svg>\r\n            <\/span>\r\n            Join Our Telegram Channel\r\n        <\/a>\r\n    <\/div> 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>Join Our Telegram Channel Subscribe on YouTube<\/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":[],"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 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