Exam 7: Capital Asset Pricing and Arbitrage Pricing Theory

Consider the capital asset pricing model.The market degree of risk aversion,A,is 3.The variance of return on the market portfolio is .0225.If the risk-free rate of return is 4%,the expected return on the market portfolio is _________.

The market portfolio has a beta of _________.

When all investors analyze securities in the same way and share the same economic view of the world we say they have ____________________.

You consider buying a share of stock at a price of $25.The stock is expected to pay a dividend of $1.50 next year and your advisory service tells you that you can expect to sell the stock in one year for $28.The stock's beta is 1.1,rf is 6% and E[rm] = 16%.What is the stock's abnormal return?

The SML is valid for _______________ and the CML is valid for ______________.

According to the CAPM,the risk premium an investor expects to receive on any stock or portfolio is _______________.

Consider the one-factor APT.The variance of the return on the factor portfolio is .08.The beta of a well-diversified portfolio on the factor is 1.2.The variance of the return on the well-diversified portfolio is approximately _________.

Security X has an expected rate of return of 13% and a beta of 1.15.The risk-free rate is 5% and the market expected rate of return is 15%.According to the capital asset pricing model,security X is _________.

A stock's alpha measures the stock's ____________________.

The expected return on the market is the risk free rate plus the _____________.

According to capital asset pricing theory,the key determinant of portfolio returns is _________.

According to the CAPM,what is the expected market return given an expected return on a security of 15.8%,a stock beta of 1.2,and a risk free interest rate of 5.0%?

Liquidity is a risk factor that __________.

Beta is a measure of ______________.

According to the capital asset pricing model,_________.

Fama and French claim that after controlling for firm size and the ratio of firm's book value to market value,beta is ______________. I.highly significant in predicting future stock returns II.relatively useless in predicting future stock returns III.a good predictor of firm's specific risk

Arbitrage is __________________________.

Research has identified two systematic factors that affect U.S.stock returns.The factors are growth in industrial production and changes in long term interest rates.Industrial production growth is expected to be 3% and long term interest rates are expected to increase by 1%.You are analyzing a stock is that has a beta of 1.2 on the industrial production factor and 0.5 on the interest rate factor.It currently has an expected return of 12%.However,if industrial production actually grows 5% and interest rates drop 2% what is your best guess of the stock's return?

Empirical results estimated from historical data indicate that betas _________.

What is the expected return on the market?