Question 1

The APT requires a benchmark portfolio

Accepted Answer

A) that is equal to the true market portfolio. 
B) that contains all securities in proportion to their market values. 
C) that need not be well-diversified. 
D) that is well-diversified and lies on the SML. 
A) that is equal to the true market portfolio. 
B) that contains all securities in proportion to their market values. 
C) that need not be well-diversified. 
D) that is well-diversified and lies on the SML.

Question 2

Consider the single factor APT.Portfolio A has a beta of 0.2 and an expected return of 13%.Portfolio B has a beta of 0.4 and an expected return of 15%.The risk-free rate of return is 10%.If you wanted to take advantage of an arbitrage opportunity, you should take a short position in portfolio _________ and a long position in portfolio _________.

Accepted Answer

A) A; A 
B) A; B 
C) B; A 
D) B; B 
A) A; A 
B) A; B 
C) B; A 
D) B; B

Question 3

Consider the one-factor APT.The variance of returns on the factor portfolio is 6%.The beta of a well-diversified portfolio on the factor is 1.1.The variance of returns on the well-diversified portfolio is approximately

Accepted Answer

A) 3.6%. 
B) 6.0%. 
C) 7.3%. 
D) 10.1%. 
A) 3.6%. 
B) 6.0%. 
C) 7.3%. 
D) 10.1%.

Question 4

Suppose you are working with two factor portfolios, portfolio 1 and portfolio 2.The portfolios have expected returns of 15% and 6%, respectively.Based on this information, what would be the expected return on well-diversified portfolio A, if A has a beta of 0.80 on the first factor and 0.50 on the second factor? The risk-free rate is 3%.

Accepted Answer

A) 15.2% 
B) 14.1% 
C) 13.3% 
D) 10.7% 
A) 15.2% 
B) 14.1% 
C) 13.3% 
D) 10.7%

Question 5

Consider the single factor APT.Portfolio A has a beta of 0.5 and an expected return of 12%.Portfolio B has a beta of 0.4 and an expected return of 13%.The risk-free rate of return is 5%.If you wanted to take advantage of an arbitrage opportunity, you should take a short position in portfolio _________ and a long position in portfolio _________.

Accepted Answer

A) A; A 
B) A; B 
C) B; A 
D) B; B 
A) A; A 
B) A; B 
C) B; A 
D) B; B

Question 6

In a multifactor APT model, the coefficients on the macro factors are often called

Accepted Answer

A) systematic risk. 
B) firm-specific risk. 
C) idiosyncratic risk. 
D) factor loadings. 
A) systematic risk. 
B) firm-specific risk. 
C) idiosyncratic risk. 
D) factor loadings.

Question 7

In the APT model, what is the nonsystematic standard deviation of an equally-weighted portfolio that has an average value of $\sigma$(ei) equal to 18% and 250 securities?

Accepted Answer

A) 1.14% 
B) 625% 
C) 0.5% 
D) 3.54% 
A) 1.14% 
B) 625% 
C) 0.5% 
D) 3.54%

Question 8

Which of the following is(are) true regarding the APT? I) The security market line does not apply to the APT.
II) More than one factor can be important in determining returns.
III) Almost all individual securities satisfy the APT relationship.
IV) It doesn't rely on the market portfolio that contains all assets.

Accepted Answer

A) II, III, and IV 
B) II and IV 
C) II and III 
D) I, II, and IV 
A) II, III, and IV 
B) II and IV 
C) II and III 
D) I, II, and IV

Question 9

A well-diversified portfolio is defined as

Accepted Answer

A) one that is diversified over a large enough number of securities that the nonsystematic variance is essentially zero. 
B) one that contains securities from at least three different industry sectors. 
C) a portfolio whose factor beta equals 1.0. 
D) a portfolio that is equally weighted. 
A) one that is diversified over a large enough number of securities that the nonsystematic variance is essentially zero. 
B) one that contains securities from at least three different industry sectors. 
C) a portfolio whose factor beta equals 1.0. 
D) a portfolio that is equally weighted.

Question 10

Consider the multifactor APT.There are two independent economic factors, F1andF2.The risk-free rate of return is 6%.The following information is available about two well-diversified portfolios:   Assuming no arbitrage opportunities exist, the risk premium on the factorF2portfolio should be

Accepted Answer

A) 3%. 
B) 4%. 
C) 5%. 
D) 6%. 
A) 3%. 
B) 4%. 
C) 5%. 
D) 6%.

Question 11

Consider the one-factor APT.The variance of returns on the factor portfolio is 11%.The beta of a well-diversified portfolio on the factor is 1.45.The variance of returns on the well-diversified portfolio is approximately

Accepted Answer

A) 23.1%. 
B) 6.0%. 
C) 7.3%. 
D) 14.1%. 
A) 23.1%. 
B) 6.0%. 
C) 7.3%. 
D) 14.1%.

Question 12

Advantage(s) of the APT is(are)

Accepted Answer

A) that the model provides specific guidance concerning the determination of the risk premiums on the factor portfolios. 
B) that the model does not require a specific benchmark market portfolio. 
C) that risk need not be considered. 
D) that the model provides specific guidance concerning the determination of the risk premiums on the factor portfolios, and that the model does not require a specific benchmark market portfolio. 
A) that the model provides specific guidance concerning the determination of the risk premiums on the factor portfolios. 
B) that the model does not require a specific benchmark market portfolio. 
C) that risk need not be considered. 
D) that the model provides specific guidance concerning the determination of the risk premiums on the factor portfolios, and that the model does not require a specific benchmark market portfolio.

Question 13

Consider the one-factor APT.The standard deviation of returns on a well-diversified portfolio is 18%.The standard deviation on the factor portfolio is 16%.The beta of the well-diversified portfolio is approximately

Accepted Answer

A) 0.80. 
B) 1.13. 
C) 1.25. 
D) 1.56. 
A) 0.80. 
B) 1.13. 
C) 1.25. 
D) 1.56.

Question 14

Which of the following is true about the security market line (SML) derived from the APT?

Accepted Answer

A) The SML has a downward slope. 
B) The SML for the APT shows expected return in relation to portfolio standard deviation. 
C) The SML for the APT has an intercept equal to the expected return on the market portfolio. 
D) The benchmark portfolio for the SML may be any well-diversified portfolio. 
A) The SML has a downward slope. 
B) The SML for the APT shows expected return in relation to portfolio standard deviation. 
C) The SML for the APT has an intercept equal to the expected return on the market portfolio. 
D) The benchmark portfolio for the SML may be any well-diversified portfolio.

Question 15

To take advantage of an arbitrage opportunity, an investor would I) construct a zero-investment portfolio that will yield a sure profit.
II) construct a zero-beta-investment portfolio that will yield a sure profit.
III) make simultaneous trades in two markets without any net investment.
IV) short sell the asset in the low-priced market and buy it in the high-priced market.

Accepted Answer

A) I and IV 
B) I and III 
C) II and III 
D) I, III, and IV 
A) I and IV 
B) I and III 
C) II and III 
D) I, III, and IV

Question 16

An important difference between CAPM and APT is

Accepted Answer

A) CAPM depends on risk-return dominance; APT depends on a no-arbitrage condition. 
B) CAPM assumes many small changes are required to bring the market back to equilibrium; APT assumes a few large changes are required to bring the market back to equilibrium. 
C) implications for prices derived from CAPM arguments are stronger than prices derived from APT arguments. 
D) Both CAPM depends on risk-return dominance; APT depends on a no-arbitrage condition and CAPM assumes many small changes are required to bring the market back to equilibrium; APT assumes a few large changes are required to bring the market back to equilibrium. 
A) CAPM depends on risk-return dominance; APT depends on a no-arbitrage condition. 
B) CAPM assumes many small changes are required to bring the market back to equilibrium; APT assumes a few large changes are required to bring the market back to equilibrium. 
C) implications for prices derived from CAPM arguments are stronger than prices derived from APT arguments. 
D) Both CAPM depends on risk-return dominance; APT depends on a no-arbitrage condition and CAPM assumes many small changes are required to bring the market back to equilibrium; APT assumes a few large changes are required to bring the market back to equilibrium.

Question 17

Which pricing model provides no guidance concerning the determination of the risk premium on factor portfolios?

Accepted Answer

A) The CAPM 
B) The multifactor APT 
C) Both the CAPM and the multifactor APT 
D) Neither the CAPM nor the multifactor APT 
A) The CAPM 
B) The multifactor APT 
C) Both the CAPM and the multifactor APT 
D) Neither the CAPM nor the multifactor APT

Question 18

Consider the single-factor APT.Stocks A and B have expected returns of 12% and 14%, respectively.The risk-free rate of return is 5%.Stock B has a beta of 1.2.If arbitrage opportunities are ruled out, stock A has a beta of

Accepted Answer

A) 0.67. 
B) 0.93. 
C) 1.30. 
D) 1.69. 
A) 0.67. 
B) 0.93. 
C) 1.30. 
D) 1.69.

Question 19

___________ a relationship between expected return and risk.

Accepted Answer

A) APT stipulates 
B) CAPM stipulates 
C) Both CAPM and APT stipulate 
D) Neither CAPM nor APT stipulate 
A) APT stipulates 
B) CAPM stipulates 
C) Both CAPM and APT stipulate 
D) Neither CAPM nor APT stipulate

Question 20

The term "arbitrage" refers to

Accepted Answer

A) buying low and selling high. 
B) short selling high and buying low. 
C) earning risk-free economic profits. 
D) negotiating for favorable brokerage fees. 
A) buying low and selling high. 
B) short selling high and buying low. 
C) earning risk-free economic profits. 
D) negotiating for favorable brokerage fees.

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

The APT requires a benchmark portfolio

Consider the one-factor APT.The variance of returns on the factor portfolio is 6%.The beta of a well-diversified portfolio on the factor is 1.1.The variance of returns on the well-diversified portfolio is approximately

In a multifactor APT model, the coefficients on the macro factors are often called

In the APT model, what is the nonsystematic standard deviation of an equally-weighted portfolio that has an average value of σ\sigmaσ (ei) equal to 18% and 250 securities?

A well-diversified portfolio is defined as

Consider the multifactor APT.There are two independent economic factors, F1andF2.The risk-free rate of return is 6%.The following information is available about two well-diversified portfolios: Assuming no arbitrage opportunities exist, the risk premium on the factorF2portfolio should be

Consider the one-factor APT.The variance of returns on the factor portfolio is 11%.The beta of a well-diversified portfolio on the factor is 1.45.The variance of returns on the well-diversified portfolio is approximately

Advantage(s) of the APT is(are)

Consider the one-factor APT.The standard deviation of returns on a well-diversified portfolio is 18%.The standard deviation on the factor portfolio is 16%.The beta of the well-diversified portfolio is approximately

Which of the following is true about the security market line (SML) derived from the APT?

An important difference between CAPM and APT is

Which pricing model provides no guidance concerning the determination of the risk premium on factor portfolios?

Consider the single-factor APT.Stocks A and B have expected returns of 12% and 14%, respectively.The risk-free rate of return is 5%.Stock B has a beta of 1.2.If arbitrage opportunities are ruled out, stock A has a beta of

___________ a relationship between expected return and risk.

The term "arbitrage" refers to

The Investment Environment

Financial Markets, Asset Classes and Financial Instruments

How Securities Are Traded

Mutual Funds and Other Investment Companies

Risk, Return, and the Historical Record

Capital Allocation to Risky Assets

Optimal Risky Portfolios

Index Models

The Capital Asset Pricing Model

The Efficient Market Hypothesis

Behavioural Finance and Technical Analysis

Empirical Evidence on Security Returns

Bond Prices and Yields

The Term Structure of Interest Rates

Managing Bond Portfolios

Macroeconomic and Industry Analysis

Equity Valuation Models

Financial Statement Analysis

Options Markets: Introduction

Option Valuation

Futures Markets

Futures, Swaps, and Risk Management

Portfolio Performance Evaluation

International Diversification

Hedge Funds

The Theory of Active Portfolio Management

Investment Policy and the Framework of the Cfa Institute

Filters

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 18% and 250 securities?

Consider the multifactor APT.There are two independent economic factors, F₁andF₂.The risk-free rate of return is 6%.The following information is available about two well-diversified portfolios: Assuming no arbitrage opportunities exist, the risk premium on the factorF₂portfolio should be