Exercises

1. What is the meaning of CAPM? Is it a linear model?

2. What are the features of a one-factor linear model?

3. What are the definitions of total risk and market risk and do you measure them?

4. Explain the similarity and difference between the following two equations:

   

5. What is the relationship between total risk and market risk for a stock?

6. Who should care about CAPM or what are the usages of the model?

7. If stock A has a higher market risk than stock B, does it mean that A has a higher expected return as well? Explain.

8. How do you measure different types of risk?

9. How do you predict the expected market returns?

10. If we know the expected market risk premium, how do you predict the cost of equity of a firm?

11. What is the logic behind the following beta adjustment formula?

    

12. Construct a portfolio with unequal weight of 20%, 10%, 30%, 10%, 10%, and 20%. The list of stocks are Walmart (WMT), International Business Machine (IBM), Citi Group (C ), Microsoft (MSFT), Google (GOOG), and Dell (DELL). Estimate their monthly...