Question 1

The term Corr($\varepsilon$R, $\varepsilon$T) = 0 tells us that:

Accepted Answer

A)  the error terms of company R and T are 0. 
B)  the unsystematic risk of companies R and T is unrelated or uncorrelated. 
C)  the correlation between the returns of companies R and T is greater than zero. 
D)  the systematic risk companies R and T is unrelated. 
A)  the error terms of company R and T are 0. 
B)  the unsystematic risk of companies R and T is unrelated or uncorrelated. 
C)  the correlation between the returns of companies R and T is greater than zero. 
D)  the systematic risk companies R and T is unrelated.

Question 2

The acronym APT stands for:

Accepted Answer

A)  Above Par Terms. 
B)  Absolute Profit Technique. 
C)  Arbitrage Pricing Theory. 
D)  Asset Puting Theory. 
E)  Assured Price Techniques. 
A)  Above Par Terms. 
B)  Absolute Profit Technique. 
C)  Arbitrage Pricing Theory. 
D)  Asset Puting Theory. 
E)  Assured Price Techniques.

Question 3

Suppose the MiniCD Corporation's common stock 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. 
A)  0.89. 
B)  1.60. 
C)  2.40. 
D)  3.00.

Question 4

To estimate the cost of equity capital for a firm using APT or 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 5

Which of the following statements is true?

Accepted Answer

A)  A well-diversified portfolio has negligible systematic risk. 
B)  A well-diversified portfolio has negligible unsystematic risk. 
C)  An individual security has negligible systematic risk. 
D)  An individual security has negligible unsystematic risk. 
A)  A well-diversified portfolio has negligible systematic risk. 
B)  A well-diversified portfolio has negligible unsystematic risk. 
C)  An individual security has negligible systematic risk. 
D)  An individual security has negligible unsystematic risk.

Question 6

In normal market conditions or when the market is rising if a security has a negative beta:

Accepted Answer

A)  the security always has a positive return. 
B)  the security has an expected return above the risk-free return. 
C)  the security has an expected return less than the risk-free rate. 
D)  the security has an expected return equal to the market portfolio. 
A)  the security always has a positive return. 
B)  the security has an expected return above the risk-free return. 
C)  the security has an expected return less than the risk-free rate. 
D)  the security has an expected return equal to the market portfolio.

Question 7

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

Accepted Answer

A)  summing the weighted $\beta$is and multiplying by the innovation in Fi. 
B)  summing the Fis. 
C)  adding the average weighted expected returns. 
D)  Summing the weighted random errors. 
A)  summing the weighted $\beta$is and multiplying by the innovation in Fi. 
B)  summing the Fis. 
C)  adding the average weighted expected returns. 
D)  Summing the weighted random errors.

Question 8

The systematic response coefficient for productivity, $\beta$P, would produce an unexpected change in any security return of ________ if the expected rate of productivity was 1.5% and the actual rate was 2.25%.

Accepted Answer

A)  0.75($\beta$P)% 
B)  -0.75($\beta$P)% 
C)  2.25($\beta$P)% 
D)  -2.25% 
A)  0.75($\beta$P)% 
B)  -0.75($\beta$P)% 
C)  2.25($\beta$P)% 
D)  -2.25%

Question 9

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 10

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. If the expected return on the stock is 6%, and no unexpected news concerning the stock surfaces, calculate the stock'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 11

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. 
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.

Question 12

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 inter-security correlation versus the beta of the CAPM. 
C)  via the industry wide or market-wide factors creating correlation between securities versus the CAPM beta. 
D)  the standardized deviation of the covariance. 
A)  very similarly to the CAPM via the beta of the security. 
B)  in terms of individual inter-security correlation versus the beta of the CAPM. 
C)  via the industry wide or market-wide factors creating correlation between securities versus the CAPM beta. 
D)  the standardized deviation of the covariance.

Question 13

Style portfolios are characterized by:

Accepted Answer

A)  their stock attributes; P/Es less than the market P/E are value funds. 
B)  their systematic factors, higher systematic factors are benchmark portfolios. 
C)  their stock attributes; higher stock attribute factors are benchmark portfolios. 
D)  their systematic factors, P/Es greater than the market are value portfolios. 
A)  their stock attributes; P/Es less than the market P/E are value funds. 
B)  their systematic factors, higher systematic factors are benchmark portfolios. 
C)  their stock attributes; higher stock attribute factors are benchmark portfolios. 
D)  their systematic factors, P/Es greater than the market are value portfolios.

Question 14

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. Calculate the stock's total return if the company announces that they had an industrial accident and the operating facilities will close down for some time thus resulting in a loss by the company of 7% in return. Assume expected return on the stock is 6%.

Accepted Answer

A)  -4.05% 
B)  -2.05% 
C)  4.55% 
D)  0.40% 
E)  1.85% 
A)  -4.05% 
B)  -2.05% 
C)  4.55% 
D)  0.40% 
E)  1.85%

Question 15

Which of the following is true about the impact on market price of a security when a company makes an announcement and the market has discounted the news?

Accepted Answer

A)  The price will change a great deal; even though the impact is primarily in the future, the future value is discounted to the present. 
B)  The price will change little, since the impact is primarily in the future. 
C)  The price will change little, since the market considers this information unimportant. 
D)  The price will change little, since the market considers this information untrue. 
E)  The price will change little, since the market has already included this information in the security's price. 
A)  The price will change a great deal; even though the impact is primarily in the future, the future value is discounted to the present. 
B)  The price will change little, since the impact is primarily in the future. 
C)  The price will change little, since the market considers this information unimportant. 
D)  The price will change little, since the market considers this information untrue. 
E)  The price will change little, since the market has already included this information in the security's price.

Question 16

For a diversified portfolio including a large number of stocks,:

Accepted Answer

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

Question 17

Systematic risk is defined as:

Accepted Answer

A)  a risk that specifically affects an asset or small group of assets. 
B)  any risk that affects a large number of assets. 
C)  any risk that has a huge impact on the return of a security. 
D)  the random component of return. 
A)  a risk that specifically affects an asset or small group of assets. 
B)  any risk that affects a large number of assets. 
C)  any risk that has a huge impact on the return of a security. 
D)  the random component of return.

Question 18

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. 
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.

Question 19

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

Accepted Answer

A)  the expected part of the announcement. 
B)  market inefficiency. 
C)  the innovation or unexpected part of the announcement. 
D)  the systematic risk. 
A)  the expected part of the announcement. 
B)  market inefficiency. 
C)  the innovation or unexpected part of the announcement. 
D)  the systematic risk.

Question 20

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.

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

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

The acronym APT stands for:

Suppose the MiniCD Corporation's common stock 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:

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

Which of the following statements is true?

In normal market conditions or when the market is rising if a security has a negative beta:

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

The systematic response coefficient for productivity, β\betaβ P, would produce an unexpected change in any security return of ________ if the expected rate of productivity was 1.5% and the actual rate was 2.25%.

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

A factor is a variable that:

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

Style portfolios are characterized by:

Which of the following is true about the impact on market price of a security when a company makes an announcement and the market has discounted the news?

For a diversified portfolio including a large number of stocks,:

Systematic risk is defined as:

A criticism of the CAPM is that it:

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

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

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

The term Corr( $\varepsilon$ _R, $\varepsilon$ _T) = 0 tells us that:

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

The systematic response coefficient for productivity, $\beta$ _P, would produce an unexpected change in any security return of ________ if the expected rate of productivity was 1.5% and the actual rate was 2.25%.