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

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

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

Which of the following factors might affect stock returns?

Multifactor models, such as the one constructed by Chen, Roll, and Ross, can better describe assets' returns by

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

Consider the one-factor APT. The variance of returns on the factor portfolio is 5%. The beta of a well-diversified portfolio on the factor is 1.2. The variance of returns on the well-diversified portfolio is approximately

Which of the following factors did Chen, Roll, and Ross not include in their multifactor model?

A _________ portfolio is a well-diversified portfolio constructed to have a beta of 1 on one of the factors and a beta of 0 on any other factor.

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

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

If arbitrage opportunities are to be ruled out, each well-diversified portfolio's expected excess return must be

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

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

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

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

Consider the multifactor model APT with two factors. Portfolio A has a beta of 1.20 on factor 1 and a beta of 1.50 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 4%. The expected return on portfolio A is __________ 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

The APT was developed in 1976 by

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

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