Exam 11: Factor Models and the Arbitrage Pricing Theory

The systematic response coefficient for productivity, bP, would produce an unexpected change in any security return of __ bP if the expected rate of productivity was 1.5% and the actual rate was 2)25%.

The term Corr(ε R , ε T ) = 0 tells us that:

In recent paper, R.David McLean of the University of Alberta and Jeffrey Pontiff of Boston College look at the impact of academic papers on "market anomalies": finance papers that have successfully tried to find new risk factors.They argue that investors should be reading these papers.In an efficient market, what would be the result if investors indeed read these papers?

An investor is using the APT to calculate expected returns and make investment decisions.He has three years of data.The investor runs into a finance professor who offers to supply him with an additional three years of data free of charge.Why should the investor accept the offer?

What would NOT be true about a GNP beta?

Three factors likely to occur in the APT model are:

A security that has a beta of zero will have an expected return of:

Shareholders discount many corporate announcements because of their prior expectations.If an announcement causes the price to change it will mostly be driven by:

In normal market conditions if a security has a negative beta:

Suppose a new type of risk appears.It is systematic, uncorrelated with previous systematic risks, was not priced before, but can be measured by a single variable.You try to price it, and you use both the CAPM and the APT.Explain how this new risk makes its way into each of the approaches.

Assuming that the single factor APT model applies, the beta for the market portfolio is:

A company owning gold mines will probably have a _____ inflation beta because an ___ increase in inflation is usually associated with an increase in gold prices.

Assume that the single factor APT model applies and a portfolio exists such that 2/3 of the funds are invested in Security Q and the rest in the risk-free asset.Security Q has a beta of 1.5.The Portfolio has a beta of:

The betas along with the factors in the APT adjust the expected return for:

In the equation R = E(R) + U, the three symbols stand for:

Compared to the CAPM, the APT has an advantage: the model adds factors until the unsystematic risk of any security is uncorrelated with the unsystematic risk of every other security.

Consider the following two statements about systematic and unsystematic risk: (i) News about GNP is always related to systematic risk. (ii) News about the CEO of a company is only unsystematic if it was not expected.

Parametric or empirical models rely on:

The acronym CAPM stands for:

Suppose that we have identified three important systematic risk factors given by exports, inflation, and industrial production.In the beginning of the year, growth in these three factors is estimated at -1%, 2.5%, and 3.5% respectively.However, actual growth in these factors turn out to be 1%, -2%, and 2%)The factor betas are given by bEX = 1.8, bI = 0.7, and bIP = 1.0.The expected return on the equity Is 6%.What would the equity's total return be if the actual growth in each of the facts was equal to Growth expected? Assume no unexpected news on the patent.