FFM Exam Study Test with Complete
Solutions 2025
Market portfolio - ANSWER Tangent portfolio
Everyone has because most efficient
Includes all assets
Weights can't be negative
Risk:Reward ratio is same for all assets
β - ANSWER Cov(Rm, Ri)/(V[Rm])
Measures systemic risk of an asset
Lower β is lower risk
βp = wAβA + wBβB + ...
Securities market graph - ANSWER E[R] vs β
α - ANSWER E[Ri] - (Rf + β(E[Rm] - Rf))
How wrong is CAPM
Conditions for theoretical arbitrage - ANSWER No initial
investment No negative cashflows
At least one positive cashflow
Law of one price - ANSWER If two securities have same payoff, they have same price
, Replicating portfolio - ANSWER if a portfolio has same payoff as security, it must
have the same price
Dynamic hedging strategy - ANSWER If a self-financing strategy has same payoff as
security, it must have the same price
Book value - ANSWER assets - debts
Q value - ANSWER book value/market value
Dividend payout ratio - ANSWER Dt/Et
D: dividend at time t
E: net earnings at time t
Earnings retention ratio - ANSWER bt = (1-dt)
expected share of earnings to be reinvested
b = 1 means all earnings reinvested, common for young companies
Growth rate of earnings - ANSWER g(t+1) = bt*ri(t+1)
ri: return on investment
G=RIB
Stock price with constant dividends - ANSWER D0/R
Price - R correlation - ANSWER negatively correlated, lower price because higher
expected return because higher beta (market changes are amplified) so low price
because more possibility of bad outcome
Solutions 2025
Market portfolio - ANSWER Tangent portfolio
Everyone has because most efficient
Includes all assets
Weights can't be negative
Risk:Reward ratio is same for all assets
β - ANSWER Cov(Rm, Ri)/(V[Rm])
Measures systemic risk of an asset
Lower β is lower risk
βp = wAβA + wBβB + ...
Securities market graph - ANSWER E[R] vs β
α - ANSWER E[Ri] - (Rf + β(E[Rm] - Rf))
How wrong is CAPM
Conditions for theoretical arbitrage - ANSWER No initial
investment No negative cashflows
At least one positive cashflow
Law of one price - ANSWER If two securities have same payoff, they have same price
, Replicating portfolio - ANSWER if a portfolio has same payoff as security, it must
have the same price
Dynamic hedging strategy - ANSWER If a self-financing strategy has same payoff as
security, it must have the same price
Book value - ANSWER assets - debts
Q value - ANSWER book value/market value
Dividend payout ratio - ANSWER Dt/Et
D: dividend at time t
E: net earnings at time t
Earnings retention ratio - ANSWER bt = (1-dt)
expected share of earnings to be reinvested
b = 1 means all earnings reinvested, common for young companies
Growth rate of earnings - ANSWER g(t+1) = bt*ri(t+1)
ri: return on investment
G=RIB
Stock price with constant dividends - ANSWER D0/R
Price - R correlation - ANSWER negatively correlated, lower price because higher
expected return because higher beta (market changes are amplified) so low price
because more possibility of bad outcome
