Question 1

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. 
E)  None of the options are true. 
A)  factor risk. 
B)  nonfactor risk. 
C)  standard deviation of returns. 
D)  factor risk and nonfactor risk. 
E)  None of the options are true.

Question 2

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 
E)  None of the options are correct. 
A)  The CAPM 
B)  The multifactor APT 
C)  Both the CAPM and the multifactor APT 
D)  Neither the CAPM nor the multifactor APT 
E)  None of the options are correct.

Question 3

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 4

Consider the multifactor APT. There are two independent economic factors, F1 and F2. The risk-free rate of return is 6%. The following information is available about two well-diversified portfolios: $\text { Portfolio }$ Assuming no arbitrage opportunities exist, the risk premium on the factor F1 portfolio should be

Accepted Answer

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

Question 5

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 6

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

Accepted Answer

A)  1.14% 
B)  625% 
C)  0.5% 
D)  3.54% 
E)  3.16% 
A)  1.14% 
B)  625% 
C)  0.5% 
D)  3.54% 
E)  3.16%

Question 7

Consider a one-factor economy. Portfolio A has a beta of 1.0 on the factor, and portfolio B has a beta of 2.0 on the factor. The expected returns on portfolios A and B are 11% and 17%, respectively. Assume that the risk-free rate is 6%, and that arbitrage opportunities exist. Suppose you invested $100,000 in the risk-free asset, $100,000 in portfolio B, and sold short $200,000 of portfolio A. Your expected profit from this strategy would be

Accepted Answer

A)  −$1,000. 
B)  $0. 
C)  $1,000. 
D)  $2,000. 
A)  −$1,000. 
B)  $0. 
C)  $1,000. 
D)  $2,000.

Question 8

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 9

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.

Accepted Answer

A)  I and III 
B)  I and IV 
C)  II and III 
D)  II and IV 
E)  Only I is correct. 
A)  I and III 
B)  I and IV 
C)  II and III 
D)  II and IV 
E)  Only I is correct.

Question 10

Consider the multifactor APT. There are two independent economic factors, F1 and F2. The risk-free rate of return is 6%. The following information is available about two well-diversified portfolios: $\text { Portfolio }$ Assuming no arbitrage opportunities exist, the risk premium on the factor F2 portfolio should be

Accepted Answer

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

Question 11

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?

Accepted Answer

A)  7.0% 
B)  8.0% 
C)  18.2% 
D)  13.0% 
E)  13.2% 
A)  7.0% 
B)  8.0% 
C)  18.2% 
D)  13.0% 
E)  13.2%

Question 12

Consider the one-factor APT. The standard deviation of returns on a well-diversified portfolio is 14%. The standard deviation on the factor portfolio is 10%. The beta of the well-diversified portfolio is approximately

Accepted Answer

A)  0.80. 
B)  1.40. 
C)  1.65. 
D)  1.82. 
A)  0.80. 
B)  1.40. 
C)  1.65. 
D)  1.82.

Question 13

The market return is 12% and the risk free rate is 4%. Smallish Inc. has a market beta of 0.9, a SMB beta of 0.65, and a HML beta of .52. The risk premium on HML and SMB are both 2%. If the single factor model generates a regression coefficient of 0.8, using the Fama-French Three Factor Model, what is the different in returns between the Three-Factor model and the single factor model expected returns on Smallish Inc. stock?

Accepted Answer

A)  6.86% 
B)  5.46% 
C)  4.30% 
D)  3.14% 
A)  6.86% 
B)  5.46% 
C)  4.30% 
D)  3.14%

Question 14

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

Accepted Answer

A)  Return on the market index 
B)  Excess return of small stocks over large stocks 
C)  Excess return of high book-to-market stocks over low book-to-market stocks 
D)  All of the factors were included in their model. 
E)  None of the factors were included in their model. 
A)  Return on the market index 
B)  Excess return of small stocks over large stocks 
C)  Excess return of high book-to-market stocks over low book-to-market stocks 
D)  All of the factors were included in their model. 
E)  None of the factors were included in their model.

Question 15

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 16

The market return is 11% and the risk free rate is 4%. Mammoth Inc. has a market beta of 1.2, a SMB beta of −.78, and a HML beta of −1.2. The risk premium on HML and SMB are both 3%. If the single factor model generates a regression coefficient of 1.2, using the Fama-French Three Factor Model, what is the different in returns between the Three-Factor model and the single factor model expected returns on Mammoth Inc. stock?

Accepted Answer

A)  5.66% 
B)  5.94% 
C)  11.3% 
D)  16.3% 
A)  5.66% 
B)  5.94% 
C)  11.3% 
D)  16.3%

Question 17

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

Accepted Answer

A)  systematic risk. 
B)  factor sensitivities. 
C)  idiosyncratic risk. 
D)  factor betas. 
E)  factor sensitivities and factor betas. 
A)  systematic risk. 
B)  factor sensitivities. 
C)  idiosyncratic risk. 
D)  factor betas. 
E)  factor sensitivities and factor betas.

Question 18

The market return is 12% and the risk free rate is 4%. Smallish Inc. has a market beta of 0.9, a SMB beta of 0.65, and a HML beta of .52. If the risk premium on HML and SMB are both 2%, using the Fama-French Three Factor Model, what is the expected Return on Smallish Inc. stock?

Accepted Answer

A)  4.86% 
B)  7.46% 
C)  12.3% 
D)  13.54% 
A)  4.86% 
B)  7.46% 
C)  12.3% 
D)  13.54%

Question 19

Consider a well-diversified portfolio, A, in a two-factor economy. The risk-free rate is 6%, the risk premium on the first factor portfolio is 4%, and the risk premium on the second factor portfolio is 3%. If portfolio A has a beta of 1.2 on the first factor and .8 on the second factor, what is its expected return?

Accepted Answer

A)  7.0% 
B)  8.0% 
C)  9.2% 
D)  13.0% 
E)  13.2% 
A)  7.0% 
B)  8.0% 
C)  9.2% 
D)  13.0% 
E)  13.2%

Question 20

In the APT model, what is the nonsystematic standard deviation of an equally-weighted portfolio that has an average value of σ(ei) equal to 20% and 40 securities?

Accepted Answer

A)  12.5% 
B)  625% 
C)  0.5% 
D)  3.54% 
E)  3.16% 
A)  12.5% 
B)  625% 
C)  0.5% 
D)  3.54% 
E)  3.16%

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

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

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

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 18% and 250 securities?

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

Consider the one-factor APT. The standard deviation of returns on a well-diversified portfolio is 14%. The standard deviation on the factor portfolio is 10%. The beta of the well-diversified portfolio is approximately

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

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

The market return is 12% and the risk free rate is 4%. Smallish Inc. has a market beta of 0.9, a SMB beta of 0.65, and a HML beta of .52. If the risk premium on HML and SMB are both 2%, using the Fama-French Three Factor Model, what is the expected Return on Smallish Inc. stock?

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 40 securities?

The Investment Environment

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

Efficient Diversification

Index Models

The Capital Asset Pricing Model

The Efficient Market Hypothesis

Behavioral 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

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

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

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

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

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

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

Consider the one-factor APT. The standard deviation of returns on a well-diversified portfolio is 14%. The standard deviation on the factor portfolio is 10%. The beta of the well-diversified portfolio is approximately

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

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

The market return is 12% and the risk free rate is 4%. Smallish Inc. has a market beta of 0.9, a SMB beta of 0.65, and a HML beta of .52. If the risk premium on HML and SMB are both 2%, using the Fama-French Three Factor Model, what is the expected Return on Smallish Inc. stock?

In the APT model, what is the nonsystematic standard deviation of an equally-weighted portfolio that has an average value of σ(ei) equal to 20% and 40 securities?

The Investment Environment

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

Efficient Diversification

Index Models

The Capital Asset Pricing Model

The Efficient Market Hypothesis

Behavioral 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 σ(e_i) equal to 18% and 250 securities?

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 40 securities?