- CFA Exams
- CFA Level I Exam
- Study Session 18. Portfolio Management (1)
- Reading 53. Portfolio Risk and Return: Part II
- Subject 4. Applications of the CAPM

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**CFA Practice Question**

You are an analyst and you have studied Firm Q's financial statements as well as the prospects for the economy. You have come up with your projection of return for Q as well as its index of systematic risk. How might you use SML?

A. You would compute the expected return from the SML and compare it to your projections to evaluate whether your stock is priced correctly.

B. You would disregard the SML expected return and go with your analytical projections since the SML is an equilibrium model and therefore not accurate in the short run.

C. You would disregard the SML expected return since it can't be measured with enough accuracy to be useful.

**Explanation:**The most useful result of the CAPM, and therefore the SML, is that it gives a fair required return measure commensurate with the degree of systematic risk. The other arguments presented apply equally to the fundamental analysis of the analyst.

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