Question 1

Multifactor models of risk and return can be broadly grouped into models that use macroeconomic factors and models that use microeconomic factors.

Accepted Answer

A) True 
 B)False  True

Question 2

In one of their empirical tests of the APT,Roll and Ross examined the relationship between a security's returns and its own standard deviation.A finding of a statistically significant relationship would indicate that

Accepted Answer

A)  APT is valid because a security's unsystematic component would be eliminated by diversification. 
B)  APT is valid because non-diversifiable components should explained by factor sensitivities. 
C)  APT is invalid because a security's unsystematic component would be eliminated by diversification. 
D)  APT is invalid because standard deviation is not an appropriate factor. 
E)  None of the above. 
A)  APT is valid because a security's unsystematic component would be eliminated by diversification. 
B)  APT is valid because non-diversifiable components should explained by factor sensitivities. 
C)  APT is invalid because a security's unsystematic component would be eliminated by diversification. 
D)  APT is invalid because standard deviation is not an appropriate factor. 
E)  None of the above. C

Question 3

In a multifactor model,time horizon risk represents

Accepted Answer

A)  Unanticipated changes in the level of overall business activity. 
B)  Unanticipated changes in investors' desired time to receive payouts. 
C)  Unanticipated changes in short term and long term inflation rates. 
D)  Unanticipated changes in the willingness of investors to take on investment risk. 
E)  None of the above. 
A)  Unanticipated changes in the level of overall business activity. 
B)  Unanticipated changes in investors' desired time to receive payouts. 
C)  Unanticipated changes in short term and long term inflation rates. 
D)  Unanticipated changes in the willingness of investors to take on investment risk. 
E)  None of the above. B

Question 4

A 1994 study by Burmeister,Roll,and Ross defined all of the following risk factors except

Accepted Answer

A)  Confidence risk 
B)  Market risk 
C)  Inflation risk 
D)  Market-timing risk 
E)  Business cycle risk 
A)  Confidence risk 
B)  Market risk 
C)  Inflation risk 
D)  Market-timing risk 
E)  Business cycle risk

Question 5

Assume that you are embarking on a test of the small-firm effect using APT.You form 10 size-based portfolios.The following finding would suggest there is evidence supporting APT:

Accepted Answer

A)  The top five size based portfolios should have excess returns that exceed the bottom five size based portfolios. 
B)  The bottom five size based portfolios should have excess returns that exceed the top five size based portfolios. 
C)  The ten portfolios must have excess returns not significantly different from zero. 
D)  The ten portfolios must have excess returns significantly different from zero. 
E)  None of the above. 
A)  The top five size based portfolios should have excess returns that exceed the bottom five size based portfolios. 
B)  The bottom five size based portfolios should have excess returns that exceed the top five size based portfolios. 
C)  The ten portfolios must have excess returns not significantly different from zero. 
D)  The ten portfolios must have excess returns significantly different from zero. 
E)  None of the above.

Question 6

The January Effect is an anomaly where returns in January are significantly smaller than in any other month.

Accepted Answer

A) True 
 B)False

Question 7

Unlike the capital asset pricing model,the arbitrage pricing theory requires only the following assumption(s):

Accepted Answer

A)  A quadratric utility function. 
B)  Normally distributed returns. 
C)  The stochastic process generating asset returns can be represented by a factor model. 
D)  A mean-variance efficient market portfolio consisting of all risky assets. 
E)  All of the above 
A)  A quadratric utility function. 
B)  Normally distributed returns. 
C)  The stochastic process generating asset returns can be represented by a factor model. 
D)  A mean-variance efficient market portfolio consisting of all risky assets. 
E)  All of the above

Question 8

Fama and French suggest a four factor model approach that explains many prior market anomalies.

Accepted Answer

A) True 
 B)False

Question 9

The equation for the single-index market model is

Accepted Answer

A)  RFRit = ai + bRmt + et 
B)  Rit = ai + bRmt + et 
C)  Rit = ai + bRFRt + et 
D)  Rmt = ai + bRit + et 
E)  Rit = ai + b(Rmt - RFRt) + et 
A)  RFRit = ai + bRmt + et 
B)  Rit = ai + bRmt + et 
C)  Rit = ai + bRFRt + et 
D)  Rmt = ai + bRit + et 
E)  Rit = ai + b(Rmt - RFRt) + et

Question 10

Findings by Basu that stocks with high P/E ratios tended to outperform stocks with low P/E ratios challenge the efficacy of the CAPM.

Accepted Answer

A) True 
 B)False

Question 11

Findings by Fama and French that stocks with high Book Value to Market Price ratios tended to produce larger risk adjusted returns than stocks with low Book Value to Market Price ratios challenge the efficacy of the CAPM.

Accepted Answer

A) True 
 B)False

Question 12

Consider the following list of risk factors:
(1) monthly growth in industrial production
(2) return on high book to market value portfolio minus return on low book to market value portfolio
(3) change in inflation
(4) excess return on stock market portfolio
(5) return on small cap portfolio minus return on big cap portfolio
(6) unanticipated change in bond credit spread
Which of the following factors would you use to develop a microeconomic-based risk factor model?

Accepted Answer

A)  (1), (2), and (3). 
B)  (1), (3), and (5). 
C)  (2), (4), and (5). 
D)  (1), (3), and (6). 
E)  (4), (5), and (6). 
A)  (1), (2), and (3). 
B)  (1), (3), and (5). 
C)  (2), (4), and (5). 
D)  (1), (3), and (6). 
E)  (4), (5), and (6).

Question 13

To date,the results of empirical tests of the Arbitrage Pricing Model have been

Accepted Answer

A)  Clearly favorable. 
B)  Clearly unfavorable. 
C)  Mixed. 
D)  Unavailable. 
E)  Biased. 
A)  Clearly favorable. 
B)  Clearly unfavorable. 
C)  Mixed. 
D)  Unavailable. 
E)  Biased.

Question 14

Consider the following list of risk factors:
(1) monthly growth in industrial production
(2) return on high book to market value portfolio minus return on low book to market value portfolio
(3) change in inflation
(4) excess return on stock market portfolio
(5) return on small cap portfolio minus return on big cap portfolio
(6) unanticipated change in bond credit spread
Which of the following factors would you use to develop a macroeconomic-based risk factor model?

Accepted Answer

A)  (1), (2), and (3). 
B)  (1), (3), and (5). 
C)  (2), (4), and (5). 
D)  (1), (3), and (6). 
E)  (4), (5), and (6). 
A)  (1), (2), and (3). 
B)  (1), (3), and (5). 
C)  (2), (4), and (5). 
D)  (1), (3), and (6). 
E)  (4), (5), and (6).

Question 15

The APT assumes that security returns are normally distributed.

Accepted Answer

A) True 
 B)False

Question 16

Two approaches to defining factors for multifactor models are to use macroeconomic variables or individual characteristics of the securities.

Accepted Answer

A) True 
 B)False

Question 17

The table below provides factor risk sensitivities and factor risk premia for a three factor model for a particular asset where factor 1 is MP the growth rate in U.S.industrial production,factor 2 is UI the difference between actual and expected inflation,and factor 3 is UPR the unanticipated change in bond credit spread.
$\begin{array}{lcc}
\text { Risk Factor } & \text { Factor Sensitivity }(\beta) & \text { Risk Premium( } \lambda) \
\hline \text { MP } & 1.76 & 0.0259 \
\text { UI } & -0.8 & -0.0432 \
\text { UPR } & 0.87 & 0.0 140
\end{array}$

Calculate the expected excess return for the asset.

Accepted Answer

A)  12.32% 
B)  9.32% 
C)  4.56% 
D)  6.32% 
E)  8.02% 
A)  12.32% 
B)  9.32% 
C)  4.56% 
D)  6.32% 
E)  8.02%

Question 18

Under the following conditions,what are the expected returns for stocks Y and Z?
$\begin{array}{ll}
\lambda^{0}=0.04 & \mathrm{~b}_{\mathrm{y}, 1}=0.5\
\mathrm{k}_{1}=0.07 & \mathrm{~b}_{\mathrm{y}, 2}=1.3 \
\mathrm{k}_{2}=0.05 & \mathrm{~b}_{\mathrm{z}_{, 1}}=1.2 \
& \mathrm{~b}_{\mathrm{z}, 2}=0.9
\end{array}$

Accepted Answer

A)  12.0% and 13.3% 
B)  13.5% and 14.2% 
C)  13.9% and 15.6% 
D)  14.0% and 16.9% 
E)  15.8% and 17.3% 
A)  12.0% and 13.3% 
B)  13.5% and 14.2% 
C)  13.9% and 15.6% 
D)  14.0% and 16.9% 
E)  15.8% and 17.3%

Question 19

Under the following conditions,what are the expected returns for stocks Y and Z?
$\begin{array}{ll}
\lambda^{0}=0.05 & \mathrm{~b}_{\mathrm{y}, 1}=0.75 \
\mathrm{k}_{1}=0.06 & \mathrm{~b}_{\mathrm{y}, 2}=1.35 \
\mathrm{k}_{2}=0.05 & \mathrm{~b}_{\mathrm{z}, 1}=1.5 \
& \mathrm{~b}_{\mathrm{z}, 2}=0.85
\end{array}$

Accepted Answer

A)  17.61% and 13.23% 
B)  16.25% and 18.25% 
C)  13.24% and 28.46% 
D)  14.83% and 17.69% 
E)  None of the above 
A)  17.61% and 13.23% 
B)  16.25% and 18.25% 
C)  13.24% and 28.46% 
D)  14.83% and 17.69% 
E)  None of the above

Question 20

A study by Chen,Roll,and Ross in 1986 examined all of the following factors in applying the Arbitrage Pricing Theory (APT)except the

Accepted Answer

A)  Return on a market value-weighted return. 
B)  Monthly growth rate in U.S. industrial production. 
C)  Change in the consumer price index (CPI). 
D)  Expected change in the bond credit spread. 
E)  All of the above factors were used in their 1986 study. 
A)  Return on a market value-weighted return. 
B)  Monthly growth rate in U.S. industrial production. 
C)  Change in the consumer price index (CPI). 
D)  Expected change in the bond credit spread. 
E)  All of the above factors were used in their 1986 study.

Exam 9: Multifactor Models of Risk and Return

Multifactor models of risk and return can be broadly grouped into models that use macroeconomic factors and models that use microeconomic factors.

In one of their empirical tests of the APT,Roll and Ross examined the relationship between a security's returns and its own standard deviation.A finding of a statistically significant relationship would indicate that

In a multifactor model,time horizon risk represents

A 1994 study by Burmeister,Roll,and Ross defined all of the following risk factors except

Assume that you are embarking on a test of the small-firm effect using APT.You form 10 size-based portfolios.The following finding would suggest there is evidence supporting APT:

The January Effect is an anomaly where returns in January are significantly smaller than in any other month.

Unlike the capital asset pricing model,the arbitrage pricing theory requires only the following assumption(s):

Fama and French suggest a four factor model approach that explains many prior market anomalies.

The equation for the single-index market model is

Findings by Basu that stocks with high P/E ratios tended to outperform stocks with low P/E ratios challenge the efficacy of the CAPM.

Findings by Fama and French that stocks with high Book Value to Market Price ratios tended to produce larger risk adjusted returns than stocks with low Book Value to Market Price ratios challenge the efficacy of the CAPM.

To date,the results of empirical tests of the Arbitrage Pricing Model have been

The APT assumes that security returns are normally distributed.

Two approaches to defining factors for multifactor models are to use macroeconomic variables or individual characteristics of the securities.

Under the following conditions,what are the expected returns for stocks Y and Z? =0.04 =0.5 =0.07 =1.3 =0.05 =1.2 =0.9

Under the following conditions,what are the expected returns for stocks Y and Z? =0.05 =0.75 =0.06 =1.35 =0.05 =1.5 =0.85

A study by Chen,Roll,and Ross in 1986 examined all of the following factors in applying the Arbitrage Pricing Theory (APT)except the

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