Question 1

To estimate the required return for a security using APT or CAPM, it is necessary to have:

Accepted Answer

A)  last period's return, beta, and the standard deviation. 
B)  last period's return, beta, and the risk-free rate. 
C)  beta, the market risk premium, and the risk-free rate. 
D)  beta, last period's return, and the standard deviation. 
E)  beta, last period's return, and the market risk premium. 
A)  last period's return, beta, and the standard deviation. 
B)  last period's return, beta, and the risk-free rate. 
C)  beta, the market risk premium, and the risk-free rate. 
D)  beta, last period's return, and the standard deviation. 
E)  beta, last period's return, and the market risk premium. C

Question 2

An advantage of the APT over CAPM is:

Accepted Answer

A)  APT can handle multiple factors. 
B)  if the factors can be properly identified, the APT may have more explanation/predictive power for returns. 
C)  the APT forces unsystematic risk to be negative to offset systematic risk; thus making the total portfolio risk free, allowing for an arbitrage opportunity for the astute investor. 
D)  APT can handle multiple factors; and if the factors can be properly identified, the APT may have more explanation/predictive power for returns. 
E)  All of these. 
A)  APT can handle multiple factors. 
B)  if the factors can be properly identified, the APT may have more explanation/predictive power for returns. 
C)  the APT forces unsystematic risk to be negative to offset systematic risk; thus making the total portfolio risk free, allowing for an arbitrage opportunity for the astute investor. 
D)  APT can handle multiple factors; and if the factors can be properly identified, the APT may have more explanation/predictive power for returns. 
E)  All of these. D

Question 3

If company A makes a new product discovery and their stock rises 5% this will have:

Accepted Answer

A)  no effect on Company B's stock price because it is a systematic risk element. 
B)  no effect on Company B's stock price because it is an unsystematic risk element. 
C)  a large effect on Company B's stock price because it is a systematic risk element. 
D)  a large effect on Company B's stock price because it is an unsystematic risk element. 
A)  no effect on Company B's stock price because it is a systematic risk element. 
B)  no effect on Company B's stock price because it is an unsystematic risk element. 
C)  a large effect on Company B's stock price because it is a systematic risk element. 
D)  a large effect on Company B's stock price because it is an unsystematic risk element. B

Question 4

Explain the conceptual differences in the theoretical development of the CAPM and APT.

Accepted Answer

CAPM depends on efficient sets notions i

Question 5

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

Factor variable that explains some of th

Question 6

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:

Accepted Answer

A)  0.00. 
B)  0.50. 
C)  0.75. 
D)  1.00. 
E)  1.50. 
A)  0.00. 
B)  0.50. 
C)  0.75. 
D)  1.00. 
E)  1.50.

Question 7

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

Accepted Answer

A)  calculation errors. 
B)  unsystematic risks. 
C)  spurious correlations of factors. 
D)  differences between actual and expected levels of factors. 
A)  calculation errors. 
B)  unsystematic risks. 
C)  spurious correlations of factors. 
D)  differences between actual and expected levels of factors.

Question 8

An investor is considering the three stocks given below:
   
C. Demonstrate that holding stock A actually reduces risk by comparing the risk of a portfolio equally weighted between stock B and T-Bills with a portfolio equally weighted between stock B and
A.
Stock B and C: Rp = .5(13.3%) + .5(9.2%) = 11.25%
Stock B and C: $\beta$ p = .5(2.1) + .5(0.75) = 1.425
Stock B and T-bills: $\beta$B&TBILL = .5(2.1) + .5(0) = 1.05
Stock's B and A: $\beta$B&A = .5(2.1) + .5(-0.1) = 1.00

Accepted Answer

Calculate the expected return and beta o

Question 9

Which of the following statements is/are true?

Accepted Answer

A)  Both APT and CAPM argue that expected excess return must be proportional to the beta(s). 
B)  APT and CAPM are the only approaches to measure expected returns in risky assets. 
C)  Both CAPM and APT are risk-based models. 
D)  Both APT and CAPM argue that expected excess return must be proportional to the beta(s); and APT and CAPM are the only approaches to measure expected returns in risky assets. 
E)  Both APT and CAPM argue that expected excess return must be proportional to the beta(s); and Both CAPM and APT are risk-based models. 
A)  Both APT and CAPM argue that expected excess return must be proportional to the beta(s). 
B)  APT and CAPM are the only approaches to measure expected returns in risky assets. 
C)  Both CAPM and APT are risk-based models. 
D)  Both APT and CAPM argue that expected excess return must be proportional to the beta(s); and APT and CAPM are the only approaches to measure expected returns in risky assets. 
E)  Both APT and CAPM argue that expected excess return must be proportional to the beta(s); and Both CAPM and APT are risk-based models.

Question 10

Suppose the JumpStart Corporation's common stock has a beta of 0.8. If the risk-free rate is 4% and the expected market return is 9%, the expected return for JumpStart's common stock is:

Accepted Answer

A)  3.2%. 
B)  4.0%. 
C)  7.2%. 
D)  8.0%. 
E)  9.0%. 
A)  3.2%. 
B)  4.0%. 
C)  7.2%. 
D)  8.0%. 
E)  9.0%.

Question 11

Based on a multi-factor APT model, the concept of portfolio diversification is to minimize which one of the following?

Accepted Answer

A)  weighted average of betas 
B)  weighted average of betas * F 
C)  F 
D)  weighted average of unsystematic risks 
E)  weighted average of expected returns 
A)  weighted average of betas 
B)  weighted average of betas * F 
C)  F 
D)  weighted average of unsystematic risks 
E)  weighted average of expected returns

Question 12

Identify at least two accounting measures that are used in empirical asset pricing models and explain how these measures can be used to identify assets that are expected to have higher returns in the future.

Accepted Answer

Two common measures used in empirical mo

Question 13

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 turns out to be 1%, -2%, and 2%. The factor betas are given by $\beta$EX = 1.8, $\beta$I = 0.7, and $\beta$IP = 1.0. What would the stock's total return be if the actual growth in each of the factors was equal to growth expected? Assume no unexpected news on the patent. Assume expected return on the stock is 6%.

Accepted Answer

A)  4% 
B)  5% 
C)  6% 
D)  7% 
E)  8% 
A)  4% 
B)  5% 
C)  6% 
D)  7% 
E)  8%

Question 14

Financial models used to describe returns are based either on a theoretical construct or parametric methods. Parametric models rely on:

Accepted Answer

A)  security betas explaining systematic factor relationships. 
B)  finding regularities and relations in past market data. 
C)  there being no true explanations of pricing relationships. 
D)  always being able to find the exception to the rule. 
A)  security betas explaining systematic factor relationships. 
B)  finding regularities and relations in past market data. 
C)  there being no true explanations of pricing relationships. 
D)  always being able to find the exception to the rule.

Question 15

In the One Factor (APT) Model, the characteristic line to estimate $\beta$i 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 change in the factor about its mean of zero. 
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 change in the factor about its mean of zero.

Question 16

If the expected rate of inflation was 3% and the actual rate was 6.2%; the systematic response coefficient from inflation, $\beta$I, would result in a change in any security return of:

Accepted Answer

A)  9.2%. 
B)  3.2 $\beta$I%. 
C)  -3.2 $\beta$I%. 
D)  3.0%. 
E)  6.2 $\beta$I%. 
A)  9.2%. 
B)  3.2 $\beta$I%. 
C)  -3.2 $\beta$I%. 
D)  3.0%. 
E)  6.2 $\beta$I%.

Question 17

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

Accepted Answer

A)  zero. 
B)  the market risk premium. 
C)  the risk free rate. 
D)  less than the risk free rate but not negative. 
E)  less than the risk free rate which can be negative. 
A)  zero. 
B)  the market risk premium. 
C)  the risk free rate. 
D)  less than the risk free rate but not negative. 
E)  less than the risk free rate which can be negative.

Question 18

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

Accepted Answer

A)  zero. 
B)  one. 
C)  the average of the risk free beta and the beta for the highest risk security. 
D)  impossible to calculate without collecting sample data. 
A)  zero. 
B)  one. 
C)  the average of the risk free beta and the beta for the highest risk security. 
D)  impossible to calculate without collecting sample data.

Question 19

The acronym CAPM stands for:

Accepted Answer

A)  Capital Asset Pricing Model. 
B)  Certain Arbitrage Pressure Model. 
C)  Current Arbitrage Prices Model. 
D)  Cumulative Asset Price Model. 
A)  Capital Asset Pricing Model. 
B)  Certain Arbitrage Pressure Model. 
C)  Current Arbitrage Prices Model. 
D)  Cumulative Asset Price Model.

Question 20

Three factors likely to occur in the APT model are:

Accepted Answer

A)  unemployment, inflation, and current rates. 
B)  inflation, GNP, and interest rates. 
C)  current rates, inflation and change in housing prices. 
D)  unemployment, college tuition, and GNP. 
A)  unemployment, inflation, and current rates. 
B)  inflation, GNP, and interest rates. 
C)  current rates, inflation and change in housing prices. 
D)  unemployment, college tuition, and GNP.

Exam 12: An Alternative View of Risk and Return: the Arbitrage Pricing Theory

To estimate the required return for a security using APT or CAPM, it is necessary to have:

An advantage of the APT over CAPM is:

If company A makes a new product discovery and their stock rises 5% this will have:

Explain the conceptual differences in the theoretical development of the CAPM and APT.

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 β\betaβ what do these represent and how do they relate to the actual return?

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:

Which of the following statements is/are true?

Suppose the JumpStart Corporation's common stock has a beta of 0.8. If the risk-free rate is 4% and the expected market return is 9%, the expected return for JumpStart's common stock is:

Based on a multi-factor APT model, the concept of portfolio diversification is to minimize which one of the following?

Identify at least two accounting measures that are used in empirical asset pricing models and explain how these measures can be used to identify assets that are expected to have higher returns in the future.

Financial models used to describe returns are based either on a theoretical construct or parametric methods. Parametric models rely on:

In the One Factor (APT) Model, the characteristic line to estimate β\betaβ i passes through the origin, unlike the estimate used in the CAPM because:

If the expected rate of inflation was 3% and the actual rate was 6.2%; the systematic response coefficient from inflation, β\betaβ I, would result in a change in any security return of:

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

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

The acronym CAPM stands for:

Three factors likely to occur in the APT model are:

Introduction to Corporate Finance

Accounting Statements and Cash Flow

Financial Planning and Growth

Financial Markets and Net Present Value: First Principles of Finance

The Time Value of Money

How to Value Bonds and Stocks

Net Present Value and Other Investment Rules

Net Present Value and Capital Budgeting

Risk Analysis, Real Options, and Capital Budgeting

Risk and Return: Lessons From Market History

Risk and Return: the Capital Asset Pricing Model

Risk, Return, and Capital Budgeting

Corporate Financing Decisions and Efficient Capital Markets

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

Issuing Equity Securities to the Public

Long-Term Debt

Leasing

Options and Corporate Finance: Basic Concepts

Options and Corporate Finance: Extensions and Applications

Warrants and Convertibles

Derivatives and Hedging Risk

Short-Term Finance and Planning

Cash Management

Credit Management

Mergers and Acquisitions

Financial Distress

International Corporate Finance

Filters

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 the One Factor (APT) Model, the characteristic line to estimate $\beta$ i passes through the origin, unlike the estimate used in the CAPM because:

If the expected rate of inflation was 3% and the actual rate was 6.2%; the systematic response coefficient from inflation, $\beta$ _I, would result in a change in any security return of: