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

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. If the risk premium on HML and SMB are both 3%, using the Fama-French Three Factor Model, what is the expected Return on Mammoth Inc. stock?

(Multiple Choice)

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Question 41

A well-diversified portfolio is defined as

(Multiple Choice)

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Question 42

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

(Multiple Choice)

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Question 43

The market return is 10% and the risk free rate is 3%. Rascals Inc. has a market beta of 1.0, a SMB beta of ?.60, and a HML beta of ?0.85. The risk premium on HML and SMB are both 2%. If the single factor model generates a regression coefficient of 1.3, 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 Rascal Inc. stock?

(Multiple Choice)

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Question 44

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

(Multiple Choice)

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Question 45

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 _.

(Multiple Choice)

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Question 46

The market return is 10% and the risk free rate is 3%. Rascals Inc. has a market beta of 1.0, a SMB beta of −.60, and a HML beta of −0.85. If the risk premium on HML and SMB are both 2%, using the Fama-French Three Factor Model, what is the expected Return on Rascal Inc. stock?

(Multiple Choice)

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Question 47

The APT requires a benchmark portfolio

(Multiple Choice)

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Question 48

The factor F in the APT model represents

(Multiple Choice)

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Question 49

There are three stocks: A, B, and C. You can either invest in these stocks or short sell them. There are three possible states of nature for economic growth in the upcoming year (each equally likely to occur); economic growth may be strong, moderate, or weak. The returns for the upcoming year on stocks A, B, and C for each of these states of nature are given below: State of Nature Moderate Weak Stock Strong Growth Growth Growth A 39\% 17\% -5\% B 30\% 15\% 0\% C 6\% 14\% 22\% If you invested in an equally-weighted portfolio of stocks B and C, your portfolio return would be _____________ if economic growth was weak.

(Multiple Choice)

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Question 50

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.

(Multiple Choice)

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Question 51

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 _.

(Multiple Choice)

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Question 52

To take advantage of an arbitrage opportunity, an investor wouldI) 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.

(Multiple Choice)

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Question 53

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

(Multiple Choice)

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Question 54

The exploitation of security mispricing in such a way that risk-free economic profits may be earned is called

(Multiple Choice)

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Question 55

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

(Multiple Choice)

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Question 56

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

(Multiple Choice)

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Question 57

There are three stocks: A, B, and C. You can either invest in these stocks or short sell them. There are three possible states of nature for economic growth in the upcoming year (each equally likely to occur); economic growth may be strong, moderate, or weak. The returns for the upcoming year on stocks A, B, and C for each of these states of nature are given below: State of Nature Moderate Weak Stock Strong Growth Growth Growth A 39\% 17\% -5\% B 30\% 15\% 0\% C 6\% 14\% 22\% If you invested in an equally-weighted portfolio of stocks A and C, your portfolio return would be ____________ if economic growth was strong.

(Multiple Choice)

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Question 58

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 25% and 50 securities?

(Multiple Choice)

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Question 59

Consider the multifactor APT with two factors. Stock A has an expected return of 14%, a beta of 1.2 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 4%. What is the risk-premium on factor 2 if no arbitrage opportunities exist?

(Multiple Choice)

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Question 60

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

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. If the risk premium on HML and SMB are both 3%, using the Fama-French Three Factor Model, what is the expected Return on Mammoth Inc. stock?

A well-diversified portfolio is defined as

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

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

The market return is 10% and the risk free rate is 3%. Rascals Inc. has a market beta of 1.0, a SMB beta of −.60, and a HML beta of −0.85. If the risk premium on HML and SMB are both 2%, using the Fama-French Three Factor Model, what is the expected Return on Rascal Inc. stock?

The APT requires a benchmark portfolio

The factor F in the APT model represents

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.

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

The exploitation of security mispricing in such a way that risk-free economic profits may be earned is called

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

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 25% and 50 securities?

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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.

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 25% and 50 securities?