Question 1

The APT was developed in 1976 by

Accepted Answer

A) Lintner. 
B) Modigliani and Miller. 
C) Ross. 
D) Sharpe. 
A) Lintner. 
B) Modigliani and Miller. 
C) Ross. 
D) Sharpe.

Question 2

Consider the one-factor APT.Assume that two portfolios, A and B, are well diversified.The betas of portfolios A and B are 1.0 and 1.5, respectively.The expected returns on portfolios A and B are 19% and 24%, respectively.Assuming no arbitrage opportunities exist, the risk-free rate of return must be

Accepted Answer

A) 4.0%. 
B) 9.0%. 
C) 14.0%. 
D) 16.5%. 
A) 4.0%. 
B) 9.0%. 
C) 14.0%. 
D) 16.5%.

Question 3

The states that

Accepted Answer

A) assets that are equivalent have the same risk. 
B) if two assets are equivalent in all economically relevant respects, then they should have the same market price. 
C) risk and return are directly related. 
D) there are always arbitrage opportunities. 
A) assets that are equivalent have the same risk. 
B) if two assets are equivalent in all economically relevant respects, then they should have the same market price. 
C) risk and return are directly related. 
D) there are always arbitrage opportunities.

Question 4

The ____________ provides an unequivocal statement on the expected return-beta relationship for all assets, whereas the _____________ implies that this relationship holds for all but perhaps a small number of securities.

Accepted Answer

A) APT; CAPM 
B) APT; OPM 
C) CAPM; APT 
D) CAPM; OPM 
A) APT; CAPM 
B) APT; OPM 
C) CAPM; APT 
D) CAPM; OPM

Question 5

Consider a single factor APT.Portfolio A has a beta of 1.0 and an expected return of 16%.Portfolio B has a beta of 0.8 and an expected return of 12%.The risk-free rate of return is 6%.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

The no-arbitrage equation of the APT states that

Accepted Answer

A) the risk premium is equal to zero. 
B) Alpha is greater than zero. 
C) the risk premium (expected excess return) on a portfolio is the product of its beta and the market-index risk premium 
D) Alpha is smaller than zero. 
A) the risk premium is equal to zero. 
B) Alpha is greater than zero. 
C) the risk premium (expected excess return) on a portfolio is the product of its beta and the market-index risk premium 
D) Alpha is smaller than zero.

Question 7

Consider the multifactor model APT with three factors.Portfolio A has a beta of 0.8 on factor 1, a beta of 1.1 on factor 2, and a beta of 1.25 on factor 3.The risk premiums on the factor 1, factor 2, and factor 3 are 3%, 5%, and 2%, respectively.The risk-free rate of return is 3%.The expected return on portfolio A is __________ if no arbitrage opportunities exist.

Accepted Answer

A) 13.5% 
B) 13.4% 
C) 16.5% 
D) 23.0% 
A) 13.5% 
B) 13.4% 
C) 16.5% 
D) 23.0%

Question 8

The APT differs from the CAPM because the APT

Accepted Answer

A) places more emphasis on market risk. 
B) minimizes the importance of diversification. 
C) recognizes multiple unsystematic risk factors. 
D) recognizes multiple systematic risk factors. 
A) places more emphasis on market risk. 
B) minimizes the importance of diversification. 
C) recognizes multiple unsystematic risk factors. 
D) recognizes multiple systematic risk factors.

Question 9

Consider the one-factor APT.The standard deviation of returns on a well-diversified portfolio is 19%.The standard deviation on the factor portfolio is 12%.The beta of the well-diversified portfolio is approximately

Accepted Answer

A) 1.58. 
B) 1.13. 
C) 1.25. 
D) 0.76. 
A) 1.58. 
B) 1.13. 
C) 1.25. 
D) 0.76.

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 factorF1portfolio 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 9%.The beta of a well-diversified portfolio on the factor is 1.25.The variance of returns on the well-diversified portfolio is approximately

Accepted Answer

A) 3.6%. 
B) 6.0%. 
C) 7.3%. 
D) 14.1%. 
A) 3.6%. 
B) 6.0%. 
C) 7.3%. 
D) 14.1%.

Question 12

Consider the multifactor APT with two factors.Stock A has an expected return of 17.6%, a beta of 1.45 on factor 1, and a beta of.86 on factor 2.The risk premium on the factor 1 portfolio is 3.2%.The risk-free rate of return is 5%.What is the risk-premium on factor 2 if no arbitrage opportunities exist?

Accepted Answer

A) 9.26% 
B) 3% 
C) 4% 
D) 7.75% 
A) 9.26% 
B) 3% 
C) 4% 
D) 7.75%

Question 13

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

Question 14

Black argues that past risk premiums on firm-characteristic variables, such as those described by Fama and French, are problematic because

Accepted Answer

A) they may result from data snooping. 
B) they are sources of systematic risk. 
C) they can be explained by security characteristic lines. 
D) they are more appropriate for a single-factor model. 
A) they may result from data snooping. 
B) they are sources of systematic risk. 
C) they can be explained by security characteristic lines. 
D) they are more appropriate for a single-factor model.

Question 15

A professional who searches for mispriced securities in specific areas such as merger-target stocks, rather than one who seeks strict (risk-free) arbitrage opportunities is engaged in

Accepted Answer

A) pure arbitrage. 
B) risk arbitrage. 
C) option arbitrage. 
D) equilibrium arbitrage. 
A) pure arbitrage. 
B) risk arbitrage. 
C) option arbitrage. 
D) equilibrium arbitrage.

Question 16

Consider the multifactor APT with two factors.The risk premiums on the factor 1 and factor 2 portfolios are 5% and 6%, respectively.Stock A has a beta of 1.2 on factor-1, and a beta of 0.7 on factor-2.The expected return on stock A is 17%.If no arbitrage opportunities exist, the risk-free rate of return is

Accepted Answer

A) 6.0%. 
B) 6.5%. 
C) 6.8%. 
D) 7.4%. 
A) 6.0%. 
B) 6.5%. 
C) 6.8%. 
D) 7.4%.

Question 17

Which of the following factors might affect stock returns?

Accepted Answer

A) the business cycle 
B) interest rate fluctuations 
C) inflation rates 
D) All of the options. 
A) the business cycle 
B) interest rate fluctuations 
C) inflation rates 
D) All of the options.

Question 18

A zero-investment portfolio with a positive expected return arises when

Accepted Answer

A) an investor has downside risk only. 
B) the law of prices is not violated. 
C) the opportunity set is not tangent to the capital-allocation line. 
D) a risk-free arbitrage opportunity exists. 
A) an investor has downside risk only. 
B) the law of prices is not violated. 
C) the opportunity set is not tangent to the capital-allocation line. 
D) a risk-free arbitrage opportunity exists.

Question 19

In a factor model, the return on a stock in a particular period will be related to

Accepted Answer

A) factor risk. 
B) nonfactor risk. 
C) standard deviation of returns. 
D) factor risk and nonfactor risk. 
A) factor risk. 
B) nonfactor risk. 
C) standard deviation of returns. 
D) factor risk and nonfactor risk.

Question 20

In the context of the Arbitrage Pricing Theory, as a well-diversified portfolio becomes larger, its nonsystematic risk approaches

Accepted Answer

A) one. 
B) infinity. 
C) zero. 
D) negative one. 
A) one. 
B) infinity. 
C) zero. 
D) negative one.

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

The APT was developed in 1976 by

The states that

The ____________ provides an unequivocal statement on the expected return-beta relationship for all assets, whereas the _____________ implies that this relationship holds for all but perhaps a small number of securities.

The no-arbitrage equation of the APT states that

The APT differs from the CAPM because the APT

Consider the one-factor APT.The standard deviation of returns on a well-diversified portfolio is 19%.The standard deviation on the factor portfolio is 12%.The beta of the well-diversified portfolio is approximately

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 factorF1portfolio should be

Consider the one-factor APT.The variance of returns on the factor portfolio is 9%.The beta of a well-diversified portfolio on the factor is 1.25.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

Black argues that past risk premiums on firm-characteristic variables, such as those described by Fama and French, are problematic because

A professional who searches for mispriced securities in specific areas such as merger-target stocks, rather than one who seeks strict (risk-free) arbitrage opportunities is engaged in

Which of the following factors might affect stock returns?

A zero-investment portfolio with a positive expected return arises when

In a factor model, the return on a stock in a particular period will be related to

In the context of the Arbitrage Pricing Theory, as a well-diversified portfolio becomes larger, its nonsystematic risk approaches

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

The provides an unequivocal statement on the expected return-beta relationship for all assets, whereas the _ implies that this relationship holds for all but perhaps a small number of 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 factorF₁portfolio should be