1.) The Capital Market Line is considered an equilbrium model in that when an as

Question

1.) The Capital Market Line is considered an equilbrium model in that when an asset is not on the line, market forces come into play to drive the asset back onto the CML. (True or False)

2.) The Capital Market Line is considered a special case of the Security Market Line. This is caused by risk being difficult to measure. (True or False)

3.) Both the Capital Market Line and the Security Market Line are "snap shots in time" as the risk free rate can change over time as well as the price of risk. (True or False)

4.) Beta (B) is a measure of nonsystematic risk. As such, if a security has a beta greater than one, the security is considered more risky than the 'market' in general.

(True or False)

5.) Beta (B) for a security has a definition. It is defined as: the covariance of the return on the security and the return on the general 'market' divided by the variance of the return on the general 'market'. (True or False)

Explanation / Answer

1. This is true since CML depicts efficient portfolios which at which the market is in equilibrium.

2. This statement is true since the only difference between SML and CML Is line that SML is based on Beta while CML is based upon excess return on security over the risk free rate. Thus, CML is used only when beta or the risk is not possible to be found.

3. This statement is true since the Risk free return as well as the Beta i.e. Price of the risk can change over time. thus, the Capital market line and Security market line would also shift with time.

4. This statement is true since the beta measures the non systematic risk in the security and also that if it is more than 1, it is riskier than the market.

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