CAPM allows you to build portfolios that are less exposed to market risk by doing which of the following?

Note: A portfolio is assumed to be some combination of securities and is not simply a cash account.

Question

CAPM allows you to build portfolios that are less exposed to market risk by doing which of the following?

Note: A portfolio is assumed to be some combination of securities and is not simply a cash account.

BlackTom AI · Accepted Answer

The question asks about how CAPM helps in constructing portfolios that are less exposed to market risk. 
Option content is not provided here, so we only have the single listed statement to evaluate: "Finding the appropriate weights for each of the stocks in the portfolio." 
Consider what CAPM implies: it describes how a security's expected return relates to its systematic risk as measured by beta, in relation to the market portfolio. To alter a portfolio’s market exposure, you don’t just pick assets; you adjust their weights so the overall beta (and thus systematic risk) moves toward the desired level. 
If you increase the weight of assets with low or negative betas and reduce those with high betas, the portfolio’s sensitivity to market movements decreases, which is exactly the mechanism CAPM-based optimization uses to manage market risk. Hence, choosing and tuning weights is the primary tool for controlling market exposure within a CAPM framework. 
On the other hand, if there were other options suggesting that diversification alone, or selecting securities by other criteria, fully eliminates market risk or that CAPM ignores weights, those would be inaccurate: diversification reduces idiosyncratic risk but not systematic risk, and CAPM analysis centers on how weights affect beta and expected return. 
Given there is no additional options provided to compare, the core idea remains that you manipulate weights to shape the portfolio’s overall market exposure under CAPM, rather than relying on other unweighted or static constructions. 
In summary, the mechanism CAPM uses to adjust a portfolio’s exposure to market risk is through selecting the assets and, crucially, assigning appropriate weights to those assets so the portfolio’s beta is aligned with the desired level of systematic risk.

CS7646 Course Content Quiz #7

CAPM allows you to build portfolios that are less exposed to market risk by doing which of the following? Note: A portfolio is assumed to be some combination of securities and is not simply a cash account.

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