Question 1

In the one factor (APT) model, the characteristic line to estimate bi passes through the origin, unlike the estimate used in the CAPM because:

Accepted Answer

A) the relationship is between the actual return on a security and the market index. 
B) the relationship measures the change in the security return over time versus the change in
The market return. 
C) the relationship measures the change in excess return on a security versus GNP. 
D) the relationship measures the change in excess return on a security versus the return on
The factor about its mean of zero. 
E) Cannot be determined without actual data. 
A) the relationship is between the actual return on a security and the market index. 
B) the relationship measures the change in the security return over time versus the change in
The market return. 
C) the relationship measures the change in excess return on a security versus GNP. 
D) the relationship measures the change in excess return on a security versus the return on
The factor about its mean of zero. 
E) Cannot be determined without actual data.

Question 2

Both the APT and the CAPM imply a positive relationship between expected return and risk.The APT views risk:

Accepted Answer

A) very similarly to the CAPM via the beta of the security. 
B) in terms of individual intersecurity correlation versus the beta of the CAPM. 
C) via the industry wide or marketwide factors creating correlation between securities. 
D) the standardized deviation of the covariance. 
E) None of the above. 
A) very similarly to the CAPM via the beta of the security. 
B) in terms of individual intersecurity correlation versus the beta of the CAPM. 
C) via the industry wide or marketwide factors creating correlation between securities. 
D) the standardized deviation of the covariance. 
E) None of the above.

Question 3

A factor is a variable that:

Accepted Answer

A) affects the returns of risky assets in a systematic fashion. 
B) affects the returns of risky assets in an unsystematic fashion. 
C) correlates with risky asset returns in a unsystematic fashion. 
D) does not correlate with the returns of risky assets in an systematic fashion. 
E) None of the above. 
A) affects the returns of risky assets in a systematic fashion. 
B) affects the returns of risky assets in an unsystematic fashion. 
C) correlates with risky asset returns in a unsystematic fashion. 
D) does not correlate with the returns of risky assets in an systematic fashion. 
E) None of the above.

Question 4

Suppose you have a portfolio that contains 2 securities.You are considering adding a third security. Now assume that none of these securities carries any unsystematic risk.What will happen to the total risk of the portfolio if you add the third security?

Accepted Answer

The key to diversiﬁcation is the reducti

Question 5

If the expected rate of inﬂation was 3% and the actual rate was 6.2%; the systematic response coeﬃcient from inﬂation, bI , would result in a change in any security return of ___ bI .

Accepted Answer

A) 9.2% 
B) 3.2% 
C) -3.2% 
D) 3.0% 
E) 6.2% 
A) 9.2% 
B) 3.2% 
C) -3.2% 
D) 3.0% 
E) 6.2%

Question 6

You have a 3 factor model to explain returns.Explain what a factor represents in the context of the APT? Each factor is multiplied by a beta.What do these represent and how do they relate to the actual return?

Accepted Answer

A factor is a variable that explains som

Question 7

In a portfolio of risky assets, the response to a factor, Fi , can be determined by:

Accepted Answer

A) summing the weighted bi s and multiplying by the factor Fi. 
B) summing the Fis. 
C) adding the average weighted expected returns. 
D) summing the weighted random errors. 
E) All of the above. 
A) summing the weighted bi s and multiplying by the factor Fi. 
B) summing the Fis. 
C) adding the average weighted expected returns. 
D) summing the weighted random errors. 
E) All of the above.

Question 8

Suppose the MiniCD Corporation's ordinary equity has a return of 12%.Assume the risk-free rate is 4%, the expected market return is 9%, and no unsystematic inﬂuence affected Mini's return.The
Beta for MiniCD is:

Accepted Answer

A) 0.89. 
B) 1.60. 
C) 2.40. 
D) 3.00. 
E) It is impossible to calculate beta without the inﬂation rate. 
A) 0.89. 
B) 1.60. 
C) 2.40. 
D) 3.00. 
E) It is impossible to calculate beta without the inﬂation rate.

Question 9

Consider the following two statements: (i) The market beta is the standardized variance of the market portfolio.
(ii) The market beta is an appropriate measure of risk under the assumptions of homogenous
Expectations and riskless borrowing and lending.

Accepted Answer

A) (i) is correct and (ii) is incorrect. 
B) (ii) is correct and (i) is incorrect. 
C) (i) and (ii) are both correct. 
D) (i) and (ii) are both incorrect. 
E) There is no such thing as a market beta. 
A) (i) is correct and (ii) is incorrect. 
B) (ii) is correct and (i) is incorrect. 
C) (i) and (ii) are both correct. 
D) (i) and (ii) are both incorrect. 
E) There is no such thing as a market beta.

Question 10

To estimate the cost of equity capital for a ﬁrm using the CAPM, it is necessary to have:

Accepted Answer

A) company ﬁnancial leverage, beta, and the market risk premium. 
B) company ﬁnancial leverage, beta, and the risk-free rate. 
C) beta, company ﬁnancial leverage, and the industry beta. 
D) beta, company ﬁnancial leverage, and the market risk premium. 
E) beta, the risk-free rate, and the market risk premium. 
A) company ﬁnancial leverage, beta, and the market risk premium. 
B) company ﬁnancial leverage, beta, and the risk-free rate. 
C) beta, company ﬁnancial leverage, and the industry beta. 
D) beta, company ﬁnancial leverage, and the market risk premium. 
E) beta, the risk-free rate, and the market risk premium.

Question 11

Suppose you hold a portfolio that consists of an investment of 50 per cent in an asset A and the remainder invested at the risk-free rate.What happens to the beta of the portfolio if the risk-free rate doubles?

Accepted Answer

The answer can be deduced from the Figur

Question 12

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%.Calculate the equity's total return if the company announces that an important patent ﬁling
Has been granted sooner than expected and will earn the company 5% more in return.

Accepted Answer

A) 7.95% 
B) 9.95% 
C) 11.55% 
D) 7.90% 
E) 9.35% 
A) 7.95% 
B) 9.95% 
C) 11.55% 
D) 7.90% 
E) 9.35%

Question 13

For a diversiﬁed portfolio including a large number of equities, the:

Accepted Answer

A) weighted average expected return goes to zero. 
B) weighted average of the betas goes to zero. 
C) weighted average of the unsystematic risk goes to zero. 
D) return of the portfolio goes to zero. 
E) return on the portfolio equals the risk-free rate. 
A) weighted average expected return goes to zero. 
B) weighted average of the betas goes to zero. 
C) weighted average of the unsystematic risk goes to zero. 
D) return of the portfolio goes to zero. 
E) return on the portfolio equals the risk-free rate.

Question 14

The unexpected return on a security, U, is made up of:

Accepted Answer

A) market risk and systematic risk. 
B) systematic risk and idiosyncratic risk. 
C) idiosyncratic risk and unsystematic risk. 
D) expected return and market risk. 
E) expected return and idiosyncratic risk. 
A) market risk and systematic risk. 
B) systematic risk and idiosyncratic risk. 
C) idiosyncratic risk and unsystematic risk. 
D) expected return and market risk. 
E) expected return and idiosyncratic risk.

Question 15

A criticism of the CAPM is that it:

Accepted Answer

A) ignores the return on the market portfolio. 
B) ignores the risk-free return. 
C) requires a single measure of systematic risk. 
D) utilizes too many factors. 
E) None of the above. 
A) ignores the return on the market portfolio. 
B) ignores the risk-free return. 
C) requires a single measure of systematic risk. 
D) utilizes too many factors. 
E) None of the above.

Question 16

The most realistic APT model would likely include:

Accepted Answer

A) multiple factors. 
B) only one factor. 
C) a factor to measure inﬂation. 
D) Both A and C. 
E) Both B and C. 
A) multiple factors. 
B) only one factor. 
C) a factor to measure inﬂation. 
D) Both A and C. 
E) Both B and C.

Question 17

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.If the expected return on the
Equity is 6%, and no unexpected news concerning the equity surfaces, calculate the equity's total
Return.

Accepted Answer

A) 2.95% 
B) 4.95% 
C) 6.55% 
D) 7.40% 
E) 8.85% 
A) 2.95% 
B) 4.95% 
C) 6.55% 
D) 7.40% 
E) 8.85%

Question 18

An investor is considerinq the three equities given below: 
$\begin{array} { | l | l | l | } 
\hline \text { Equity } & \text { Expected Return } & \text { Beta } \
\hline \text { A } & 6.0 \% & - 0.10 \
\hline \text { B } & 13.3 \% & 2.10 \
\hline \text { C } & 9.2 \% & 0.75 \
\hline \text { Market Portfolio } & 10.0 \% & 1.00 \
\hline \text { T-Bills } & 7.0 \% & 0.00
\end{array}$
 Calculate the expected return and beta of a portfolio equally weighted between equities B and C. Demonstrate that holding equity A actually reduces risk by comparing the risk of a portfolio equally weighted between equity B and T-Bills with a portfolio equally weighted between equity B and A.

Accepted Answer

Equity B and C: Rp = .5(13.3%) + .5(9.2%

Question 19

The single factor APT model that resembles the market model uses _________ as the single factor.

Accepted Answer

A) arbitrage fees 
B) GNP 
C) the inﬂation rate 
D) the market return 
E) the risk-free return 
A) arbitrage fees 
B) GNP 
C) the inﬂation rate 
D) the market return 
E) the risk-free return

Question 20

A growth equity portfolio and a value portfolio might be characterized:

Accepted Answer

A) each by their P/E relative to the index P/E; high P/E for growth and lower for value. 
B) as earning a high rate of return for a growth security and a low rate of return for value
Security irrespective of risk. 
C) low unsystematic risk and high systematic risk respectively. 
D) moderate systematic risk and zero systematic risk respectively. 
E) None of the above. 
A) each by their P/E relative to the index P/E; high P/E for growth and lower for value. 
B) as earning a high rate of return for a growth security and a low rate of return for value
Security irrespective of risk. 
C) low unsystematic risk and high systematic risk respectively. 
D) moderate systematic risk and zero systematic risk respectively. 
E) None of the above.

Exam 11: Factor Models and the Arbitrage Pricing Theory

In the one factor (APT) model, the characteristic line to estimate bi passes through the origin, unlike the estimate used in the CAPM because:

Both the APT and the CAPM imply a positive relationship between expected return and risk.The APT views risk:

A factor is a variable that:

Suppose you have a portfolio that contains 2 securities.You are considering adding a third security. Now assume that none of these securities carries any unsystematic risk.What will happen to the total risk of the portfolio if you add the third security?

If the expected rate of inﬂation was 3% and the actual rate was 6.2%; the systematic response coeﬃcient from inﬂation, bI , would result in a change in any security return of ___ bI .

You have a 3 factor model to explain returns.Explain what a factor represents in the context of the APT? Each factor is multiplied by a beta.What do these represent and how do they relate to the actual return?

In a portfolio of risky assets, the response to a factor, Fi , can be determined by:

Suppose the MiniCD Corporation's ordinary equity has a return of 12%.Assume the risk-free rate is 4%, the expected market return is 9%, and no unsystematic inﬂuence affected Mini's return.The Beta for MiniCD is:

Consider the following two statements: (i) The market beta is the standardized variance of the market portfolio. (ii) The market beta is an appropriate measure of risk under the assumptions of homogenous Expectations and riskless borrowing and lending.

To estimate the cost of equity capital for a ﬁrm using the CAPM, it is necessary to have:

Suppose you hold a portfolio that consists of an investment of 50 per cent in an asset A and the remainder invested at the risk-free rate.What happens to the beta of the portfolio if the risk-free rate doubles?

For a diversiﬁed portfolio including a large number of equities, the:

The unexpected return on a security, U, is made up of:

A criticism of the CAPM is that it:

The most realistic APT model would likely include:

The single factor APT model that resembles the market model uses _________ as the single factor.

A growth equity portfolio and a value portfolio might be characterized:

Introduction to Corporate Finance

Corporate Governance

Financial Statement Analysis

Discounted Cash Flow Valuation

Bond, Equity and Firm Valuation

Net Present Value and Other Investment Rules

Making Capital Investment Decisions

Risk Analysis, Real Options and Capital Budgeting

Risk and Return: Lessons From Market History

Risk and Return: the Capital Asset Pricing Model

Risk, Cost of Capital and Capital Budgeting

Efficient Capital Markets and Behavioural Finance

Long-Term Financing: an Introduction

Capital Structure: Basic Concepts

Capital Structure: Limits to the Use of Debt

Valuation and Capital Budgeting for the Levered Firm

Dividends and Other Payouts

Equity Financing

Debt Financing

Leasing

Options and Corporate Finance

Options and Corporate Finance: Extensions and Applications

Warrants and Convertibles

Financial Risk Management With Derivatives

Short-Term Finance and Planning

Short-Term Capital Management

Mergers and Acquisitions

Financial Distress

International Corporate Finance

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