Exam 10: Arbitrage Pricing Theory and Multifactor Models of Risk and Return

Consider the single factor APT.Portfolios A and B have expected returns of 14% and 18%, respectively.The risk-free rate of return is 7%.Portfolio A has a beta of 0.7.If arbitrage opportunities are ruled out, portfolio B must have a beta of

Imposing the no-arbitrage condition on a single-factor security market implies which of the following statements? I) The expected return-beta relationship is maintained for all but a small number of well-diversified portfolios. II) The expected return-beta relationship is maintained for all well-diversified portfolios. III) The expected return-beta relationship is maintained for all but a small number of individual securities. IV) The expected return-beta relationship is maintained for all individual securities.

In developing the APT, Ross assumed that uncertainty in asset returns was a result of

The feature of the APT that offers the greatest potential advantage over the CAPM is the

The factor F in the APT model represents

Consider the multifactor model APT with two factors.Portfolio A has a beta of 0.75 on factor 1 and a beta of 1.25 on factor 2.The risk premiums on the factor-1 and factor-2 portfolios are 1% and 7%, respectively.The risk-free rate of return is 7%.The expected return on portfolio A is __________ if no arbitrage opportunities exist.

An investor will take as large a position as possible when an equilibrium-price relationship is violated.This is an example of

Consider the multifactor APT with two factors.Stock A has an expected return of 16.4%, a beta of 1.4 on factor 1, and a beta of.8 on factor 2.The risk premium on the factor-1 portfolio is 3%.The risk-free rate of return is 6%.What is the risk-premium on factor 2 if no arbitrage opportunities exist?

Consider the multifactor APT.The risk premiums on the factor 1 and factor 2 portfolios are 5% and 3%, respectively.The risk-free rate of return is 10%.Stock A has an expected return of 19% and a beta on factor 1 of 0.8.Stock A has a beta on factor 2 of

An arbitrage opportunity exists if an investor can construct a __________ investment portfolio that will yield a sure profit.

Consider a single factor APT.Portfolio A has a beta of 2.0 and an expected return of 22%.Portfolio B has a beta of 1.5 and an expected return of 17%.The risk-free rate of return is 4%.If you wanted to take advantage of an arbitrage opportunity, you should take a short position in portfolio __________ and a long position in portfolio _______.

In the APT model, what is the nonsystematic standard deviation of an equally-weighted portfolio that has an average value of $\sigma$ (e_i) equal to 20% and 20 securities?

Consider the one-factor APT.The standard deviation of returns on a well-diversified portfolio is 22%.The standard deviation on the factor portfolio is 14%.The beta of the well-diversified portfolio is approximately

Which of the following factors were used by Fama and French in their multifactor model?

Consider the multifactor APT.The risk premiums on the factor 1 and factor 2 portfolios are 6% and 4%, respectively.The risk-free rate of return is 4%.Stock A has an expected return of 16% and a beta on factor-1 of 1.3.Stock A has a beta on factor-2 of

Consider a well-diversified portfolio, A, in a two-factor economy.The risk-free rate is 5%, the risk premium on the first-factor portfolio is 4%, and the risk premium on the second-factor portfolio is 6%.If portfolio A has a beta of 0.6 on the first factor and 1.8 on the second factor, what is its expected return?

In the APT model, what is the nonsystematic standard deviation of an equally-weighted portfolio that has an average value of $\sigma$ (e_i) equal to 25% and 50 securities?

Multifactor model scan better describe assets' returns by

Multifactor models seek to improve the performance of the single-index model by

In terms of the risk/return relationship in the APT,