Use the Following Information to Answer the Question(s)below

question 29

Multiple Choice

Use the following information to answer the question(s) below.
Suppose that all stocks can be grouped into two mutually exclusive portfolios (with each stock appearing in only one portfolio) : growth stocks and value stocks.Assume that these two portfolios are equal in size (market value) ,the correlation of their returns is equal to 0.6,and the portfolios have the following characteristics: The risk free rate is 3.5%.
-Which of the following is NOT an assumption used in deriving the Capital Asset Pricing Model (CAPM) ?

• A)Investors have homogeneous expectations regarding the volatilities,correlation,and expected returns of securities.
• B)Investors have homogeneous risk adverse preferences toward taking on risk.
• C)Investors hold only efficient portfolios of traded securities,that is portfolios that yield the maximum expected return for the given level of volatility.
• D)Investors can buy and sell all securities at competitive market prices without incurring taxes or transactions cost and can borrow and lend at the risk-free interest rate.

---

Definitions:

Effective Rate of Interest

The real rate of interest earned or paid over a period, considering compounding.

Compounded Options

Compounded options are not a standard financial term, suggesting a mix-up or confusion with terms related to compound interest or options trading. NO.

GICs

In Canada, Guaranteed Investment Certificates represent an investment option guaranteeing a fixed return rate over a certain time frame.

Annually

Happening annually or pertaining to a timeframe of one year.