Question 1

A study by Chen, Roll, and Ross in 1986 examined all of the following factors in applying the Arbitrage Pricing Theory (APT) except the

Accepted Answer

A) Return on a market value-weighted return. 
B) Monthly growth rate in U.S.industrial production. 
C) Change in the consumer price index (CPI). 
D) Expected change in the bond credit spread. 
E) All of the above factors were used in their 1986 study. 
A) Return on a market value-weighted return. 
B) Monthly growth rate in U.S.industrial production. 
C) Change in the consumer price index (CPI). 
D) Expected change in the bond credit spread. 
E) All of the above factors were used in their 1986 study.

Question 2

Exhibit 9.2
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Consider the three stocks, stock X, stock Y and stock Z, that have the following factor loadings (or factor betas).
   The zero-beta return ($\lambda$S1U1B10S1U1B0) = 3%, and the risk premia are $\lambda$S1U1B11S1U1B0 = 10%, $\lambda$S1U1B12S1U1B0 = 8%. Assume that all three stocks are currently priced at $50.
-Refer to Exhibit 9.2. Assume that you wish to create a portfolio with no net wealth invested and the portfolio that achieves this has 50% in stock X, -100% in stock Y, and 50% in stock Z. The net arbitrage profit is

Accepted Answer

A) $8 
B) $5 
C) $7 
D) $12 
E) $15 
A) $8 
B) $5 
C) $7 
D) $12 
E) $15

Question 3

Exhibit 10.9
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
You are provided with the following year end information for All Systems Corporation.
  
-Multifactor models of risk and return can be broadly grouped into models that use macroeconomic factors and models that use microeconomic factors.

Accepted Answer

A) True 
 B)False

Question 4

Exhibit 9.2
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Consider the three stocks, stock X, stock Y and stock Z, that have the following factor loadings (or factor betas).
   The zero-beta return ($\lambda$S1U1B10S1U1B0) = 3%, and the risk premia are $\lambda$S1U1B11S1U1B0 = 10%, $\lambda$S1U1B12S1U1B0 = 8%. Assume that all three stocks are currently priced at $50.
-Refer to Exhibit 9.2. The new prices now for stocks X, Y, and Z that will not allow for arbitrage profits are

Accepted Answer

A) $53.55, $54.4, $55.25 
B) $45.35, $54.4, $55.25 
C) $55.55, $56.35, $57.15 
D) $50, $50, $50 
E) $51.35, $47.79, $51.58. 
A) $53.55, $54.4, $55.25 
B) $45.35, $54.4, $55.25 
C) $55.55, $56.35, $57.15 
D) $50, $50, $50 
E) $51.35, $47.79, $51.58.

Question 5

Exhibit 9.1
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
  
-Cho, Elton, and Gruber tested the APT by examining the number of factors in the return generating process and found that

Accepted Answer

A) Five factors were required using Roll-Ross procedures. 
B) Six factors were present when using historical beta. 
C) Fundamental betas indicated a need for three factors. 
D) All of the above. 
E) None of the above. 
A) Five factors were required using Roll-Ross procedures. 
B) Six factors were present when using historical beta. 
C) Fundamental betas indicated a need for three factors. 
D) All of the above. 
E) None of the above.

Question 6

Under the following conditions, what are the expected returns for stocks Y and Z?

Accepted Answer

A) 17.61% and 13.23% 
B) 16.25% and 18.25% 
C) 13.24% and 28.46% 
D) 14.83% and 17.69% 
E) None of the above 
A) 17.61% and 13.23% 
B) 16.25% and 18.25% 
C) 13.24% and 28.46% 
D) 14.83% and 17.69% 
E) None of the above

Question 7

The table below provides factor risk sensitivities and factor risk premia for a three factor model for a particular asset where factor 1 is MP the growth rate in U.S. industrial production, factor 2 is UI the difference between actual and expected inflation, and factor 3 is UPR the unanticipated change in bond credit spread.   Calculate the expected excess return for the asset.

Accepted Answer

A) 12.32% 
B) 9.32% 
C) 4.56% 
D) 6.32% 
E) 8.02% 
A) 12.32% 
B) 9.32% 
C) 4.56% 
D) 6.32% 
E) 8.02%

Question 8

In a macro-economic based risk factor model the following factor would be one of many appropriate factors:

Accepted Answer

A) Confidence risk. 
B) Maturity risk. 
C) Expected inflation risk. 
D) Call risk. 
E) Return difference between small capitalization and large capitalization stocks. 
A) Confidence risk. 
B) Maturity risk. 
C) Expected inflation risk. 
D) Call risk. 
E) Return difference between small capitalization and large capitalization stocks.

Question 9

Exhibit 10.9
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
You are provided with the following year end information for All Systems Corporation.
  
-The APT does not require a market portfolio.

Accepted Answer

A) True 
 B)False

Question 10

Exhibit 10.9
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
You are provided with the following year end information for All Systems Corporation.
  
-Two approaches to defining factors for multifactor models are to use macroeconomic variables or individual characteristics of the securities.

Accepted Answer

A) True 
 B)False

Question 11

Exhibit 9.2
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Consider the three stocks, stock X, stock Y and stock Z, that have the following factor loadings (or factor betas).
   The zero-beta return ($\lambda$S1U1B10S1U1B0) = 3%, and the risk premia are $\lambda$S1U1B11S1U1B0 = 10%, $\lambda$S1U1B12S1U1B0 = 8%. Assume that all three stocks are currently priced at $50.
-Refer to Exhibit 9.2. Assume that you wish to create a portfolio with no net wealth invested. The portfolio that achieves this has 50% in stock X, -100% in stock Y, and 50% in stock Z. The weighted exposure to risk factor 2 for stocks X, Y, and Z are

Accepted Answer

A) 0.50, -1.0, 0.50 
B) -0.50, 1.0, -0.50 
C) 0.60, -0.85, 0.25 
D) -0.275, 0.10, 0.175 
E) None of the above. 
A) 0.50, -1.0, 0.50 
B) -0.50, 1.0, -0.50 
C) 0.60, -0.85, 0.25 
D) -0.275, 0.10, 0.175 
E) None of the above.

Question 12

Fama and French suggest a three factor model approach. Which of the following is not included in their approach?

Accepted Answer

A) Excess returns to a broad market index 
B) Return differences between small-cap and large-cap portfolios 
C) Return differences between industry characteristics 
D) Return differences between value and growth stocks 
E) Both c and d 
A) Excess returns to a broad market index 
B) Return differences between small-cap and large-cap portfolios 
C) Return differences between industry characteristics 
D) Return differences between value and growth stocks 
E) Both c and d

Question 13

Under the following conditions, what are the expected returns for stocks Y and Z?

Accepted Answer

A) 12.0% and 13.3% 
B) 13.5% and 14.2% 
C) 13.9% and 15.6% 
D) 14.0% and 16.9% 
E) 15.8% and 17.3% 
A) 12.0% and 13.3% 
B) 13.5% and 14.2% 
C) 13.9% and 15.6% 
D) 14.0% and 16.9% 
E) 15.8% and 17.3%

Question 14

Exhibit 9.1
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
  
-Refer to Exhibit 9.1. In the list above which are assumptions of the Arbitrage Pricing Model?

Accepted Answer

A) (1) and (4) 
B) (1), (2), and (3) 
C) (1), (3), and (5) 
D) (2), (3), (4), and (6) 
E) All six are assumptions 
A) (1) and (4) 
B) (1), (2), and (3) 
C) (1), (3), and (5) 
D) (2), (3), (4), and (6) 
E) All six are assumptions

Question 15

Exhibit 10.9
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
You are provided with the following year end information for All Systems Corporation.
  
-The APT assumes that capital markets are perfectly competitive.

Accepted Answer

A) True 
 B)False

Question 16

Exhibit 10.9
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
You are provided with the following year end information for All Systems Corporation.
  
-Arbitrage Pricing Theory (APT) specifies the exact number of risk factors and their identity

Accepted Answer

A) True 
 B)False

Question 17

Exhibit 9.3
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Stocks A, B, and C have two risk factors with the following beta coefficients. The zero-beta return ($\lambda$S1U1B10S1U1B0) = .025 and the risk premiums for the two factors are ($\lambda$S1U1B11S1U1B0) = .12 and ($\lambda$S1U1B10S1U1B0) = .10.
  
-Refer to Exhibit 9.3. Calculate the expected returns for stocks A, B, C. A B C

Accepted Answer

A) 0.082 0.091 0.033 
B) 0.105 0.109 0.032 
C) 0.132 0.128 0.033 
D) 0.165 0.121 0.032 
E) 0.850 0.850 0.610 
A) 0.082 0.091 0.033 
B) 0.105 0.109 0.032 
C) 0.132 0.128 0.033 
D) 0.165 0.121 0.032 
E) 0.850 0.850 0.610

Question 18

Exhibit 9.1
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
  
-Dhrymes, Friend, and Gultekin, in their study of the APT, found that

Accepted Answer

A) As the number of securities used to form portfolios increased the number of factors that characterized the return generating process decreased. 
B) As the number of securities used to form portfolios increased the number of factors that characterized the return generating process increased. 
C) As the number of securities used to form portfolios decreased the number of factors that characterized the return generating process increased. 
D) As the number of securities used to form portfolios increased the number of factors that characterized the return generating process remained unchanged. 
E) None of the above. 
A) As the number of securities used to form portfolios increased the number of factors that characterized the return generating process decreased. 
B) As the number of securities used to form portfolios increased the number of factors that characterized the return generating process increased. 
C) As the number of securities used to form portfolios decreased the number of factors that characterized the return generating process increased. 
D) As the number of securities used to form portfolios increased the number of factors that characterized the return generating process remained unchanged. 
E) None of the above.

Question 19

Exhibit 9.3
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Stocks A, B, and C have two risk factors with the following beta coefficients. The zero-beta return ($\lambda$S1U1B10S1U1B0) = .025 and the risk premiums for the two factors are ($\lambda$S1U1B11S1U1B0) = .12 and ($\lambda$S1U1B10S1U1B0) = .10.
  
-Refer to Exhibit 9.3. Assume that stocks A, B, and C never pay dividends and stocks A, B, and C are currently trading at $10, $20, and $30, respectively. What is the expected price next year for each stock? A B C

Accepted Answer

A) $10.82 $21.82 $30.99 
B) $11.05 $22.18 $30.96 
C) $11.32 $22.56 $30.99 
D) $11.65 $22.42 $30.96 
E) $18.50 $37.00 $48.30 
A) $10.82 $21.82 $30.99 
B) $11.05 $22.18 $30.96 
C) $11.32 $22.56 $30.99 
D) $11.65 $22.42 $30.96 
E) $18.50 $37.00 $48.30

A study by Chen, Roll, and Ross in 1986 examined all of the following factors in applying the Arbitrage Pricing Theory (APT) except the

Exhibit 9.1 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) -Cho, Elton, and Gruber tested the APT by examining the number of factors in the return generating process and found that

Under the following conditions, what are the expected returns for stocks Y and Z?

In a macro-economic based risk factor model the following factor would be one of many appropriate factors:

Exhibit 10.9 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) You are provided with the following year end information for All Systems Corporation. -The APT does not require a market portfolio.

Exhibit 10.9 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) You are provided with the following year end information for All Systems Corporation. -Two approaches to defining factors for multifactor models are to use macroeconomic variables or individual characteristics of the securities.

Fama and French suggest a three factor model approach. Which of the following is not included in their approach?

Under the following conditions, what are the expected returns for stocks Y and Z?

Exhibit 9.1 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) -Refer to Exhibit 9.1. In the list above which are assumptions of the Arbitrage Pricing Model?

Exhibit 10.9 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) You are provided with the following year end information for All Systems Corporation. -The APT assumes that capital markets are perfectly competitive.

Exhibit 10.9 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) You are provided with the following year end information for All Systems Corporation. -Arbitrage Pricing Theory (APT) specifies the exact number of risk factors and their identity

Exhibit 9.1 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) -Dhrymes, Friend, and Gultekin, in their study of the APT, found that

The Investment Setting

The Asset Allocation Decision

Selecting Investments in a Global Market

Organization and Functioning of Securities Markets

Security-Market Indexes

Efficient Capital Markets

An Introduction to Portfolio Management

An Introduction to Asset Pricing Models

Analysis of Financial Statements

Introduction to Security Valuation

Macroanalysis and Microvaluation of the Stock Market

Industry Analysis

Company Analysis and Stock Valuation

Technical Analysis

Equity Portfolio Management Strategies

Bond Fundamentals

The Analysis and Valuation of Bonds

Bond Portfolio Management Strategies

An Introduction to Derivative Markets and Securities

Forward and Futures Contracts

Option Contracts

Swap Contracts, Convertible Securities, and Other Embedded Derivatives

Professional Money Management, Alternative Assets, and Industry Ethics

Evaluation of Portfolio Performance

Filters

Exam 9: Multifactor Models of Risk and Return

A study by Chen, Roll, and Ross in 1986 examined all of the following factors in applying the Arbitrage Pricing Theory (APT) except the

Exhibit 9.1 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) -Cho, Elton, and Gruber tested the APT by examining the number of factors in the return generating process and found that

Under the following conditions, what are the expected returns for stocks Y and Z?

In a macro-economic based risk factor model the following factor would be one of many appropriate factors:

Exhibit 10.9 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) You are provided with the following year end information for All Systems Corporation. -The APT does not require a market portfolio.

Exhibit 10.9 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) You are provided with the following year end information for All Systems Corporation. -Two approaches to defining factors for multifactor models are to use macroeconomic variables or individual characteristics of the securities.

Fama and French suggest a three factor model approach. Which of the following is not included in their approach?

Under the following conditions, what are the expected returns for stocks Y and Z?

Exhibit 9.1 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) -Refer to Exhibit 9.1. In the list above which are assumptions of the Arbitrage Pricing Model?

Exhibit 10.9 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) You are provided with the following year end information for All Systems Corporation. -The APT assumes that capital markets are perfectly competitive.

Exhibit 10.9 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) You are provided with the following year end information for All Systems Corporation. -Arbitrage Pricing Theory (APT) specifies the exact number of risk factors and their identity

Exhibit 9.1 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) -Dhrymes, Friend, and Gultekin, in their study of the APT, found that

The Investment Setting

The Asset Allocation Decision

Selecting Investments in a Global Market

Organization and Functioning of Securities Markets

Security-Market Indexes

Efficient Capital Markets

An Introduction to Portfolio Management

An Introduction to Asset Pricing Models

Analysis of Financial Statements

Introduction to Security Valuation

Macroanalysis and Microvaluation of the Stock Market

Industry Analysis

Company Analysis and Stock Valuation

Technical Analysis

Equity Portfolio Management Strategies

Bond Fundamentals

The Analysis and Valuation of Bonds

Bond Portfolio Management Strategies

An Introduction to Derivative Markets and Securities

Forward and Futures Contracts

Option Contracts

Swap Contracts, Convertible Securities, and Other Embedded Derivatives

Professional Money Management, Alternative Assets, and Industry Ethics

Evaluation of Portfolio Performance

Filters