Select all of the below statements that are true.

Question

BlackTom AI · Accepted Answer

We start by identifying all statements and clearly restating them for examination.

Option 1: 'In the context of the CAPM, the market portfolio coincides with the tangent portfolio for all investors.'
Here, the key idea is that under the CAPM framework, the tangent portfolio to the efficient frontier when borrowing and lending at the risk-free rate is the market portfolio, and all investors’ optimal choices lie on the capital market line formed by combining the risk-free asset with that market portfolio. This implies that, given the assumptions of homogeneous beliefs, mean-variance preferences, and the ability to borrow/lend at the risk-free rate, the market portfolio serves as the tangent portfolio shared by all investors. Therefore, this statement is true in the CAPM context as it captures the central result that the market portfolio is the efficient tangency point to the CAL.

Option 2: 'In the context of the CAPM, negative beta assets have negative risk premia.'
In CAPM, the expected excess return of an asset is equal to its beta times the market risk premium: E(R_i) - R_f = beta_i [E(R_m) - R_f]. If beta_i is negative and the market risk premium (E(R_m) - R_f) is positive, the right-hand side is negative, implying a negative expected excess return. This aligns with the intuition that assets moving opposite to the market (negative beta) should command lower (or negative) risk premia relative to the risk-free rate. Hence, this statement is true.

Option 3: 'According to the CAPM, a risk averse investor should hold the minimum variance portfolio.'
This is not aligned with CAPM’s prescriptions. A risk-averse investor is typically expected to hold the market portfolio combined with the risk-free asset (on the capital market line), not necessarily the single minimum-variance portfolio. The minimum-variance portfolio is the leftmost point of the efficient frontier and does not, by itself, maximize the mean-variance trade-off (unless the risk-free asset and borrowing constraints align by coincidence). Therefore, this claim is false.

Option 4: 'The CAPM market portfolio is the price-weighted index of all risky assets.'
CAPM’s market portfolio is not price-weighted; it is traditionally interpreted as a value-weighted (capitalization-weighted) portfolio comprising all risky assets that are investable in the market, with weights proportional to market values (or capitalizations). A price-weighted index (like a price-weighted Dow Jones-type index) does not correspond to the CAPM market portfolio. Consequently, this statement is false.

In summary, options 1 and 2 reflect core CAPM implications, while options 3 and 4 misstate the model’s prescriptions or portfolio construction concepts.

Select all of the below statements that are true.

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