Portfolio Theory: Market Portfolio and CAPM question with complete solution 2023

Portfolio Theory: Market Portfolio and CAPM question with complete solution 2023Market portfolio - correct answer the portfolio of all stocks held in proportion to their market weight, vi Market Capitalization - correct answer The total value of a company's issued shares Return on the market - correct answer S&P 500 - correct answer Tracks performance of a value weighted portfolio of 500 of the largest US companies Value weighted - correct answer weights are proportional to the companies' market capitalizations Are all indices value weighted? - correct answer No Japanese index is equally weighted and Dow Jones is price weighted How can you get exposure to the index? - correct answer - Index tracking funds - Ex: Ticker Symbol SPY - Called passive investing Capital Asset Pricing Model (CAPM) - correct answer an equilibrium model of expected returns Two main results of CAPM - correct answer - The market portfolio if the tangency portfolio and thus has the highest possible Sharpe ratio - Stock prices/ expected returns depend on a stock's market beta (risk) CAPM Assumptions - correct answer - 2 period model (t = 0 and t = 1) - Everyone has same views on expected returns and variances/ covariances (Homogeneous