Question 1

In the APT model,the identity of all the factors is known.

Accepted Answer

A) True 
 B)False

Question 2

One method for estimating the parameters for the Capital Asset Pricing Model is to estimate a portfolio's characteristic line via regression techniques using the single-index market model.

Accepted Answer

A) True 
 B)False

Question 3

Consider the following two factor APT model
E(R)= ?? + ??b? + ??b?

Accepted Answer

A)  ?1 is the expected return on the asset with zero systematic risk. 
B)  ?1 is the expected return on asset 1. 
C)  ?1 is the pricing relationship between the risk premium and the asset. 
D)  ?1 is the risk premium. 
E)  ?1 is the factor loading. 
A)  ?1 is the expected return on the asset with zero systematic risk. 
B)  ?1 is the expected return on asset 1. 
C)  ?1 is the pricing relationship between the risk premium and the asset. 
D)  ?1 is the risk premium. 
E)  ?1 is the factor loading.

Question 4

Exhibit 9.2
Use the Information Below for the Following Problem(S)
Consider the three stocks, stock X, stock Y and stock Z, that have the following factor loadings (or factor betas).
 $$\begin{array} { c c c } 
\text { Stack } & \text { Factor 1 Londine } & \text { Factor } 2 \text { Londing } \
\hline X & - [ .55 & 1.2 \
Y & - [ .10 & 0.85 \
Z & 0.35 & 0.5
\end{array}$$ 
The zero-beta return (??) = 3%, and the risk premia are ?? = 10%, ?? = 8%. Assume that all three stocks are currently priced at $50.
-Refer to Exhibit 9.2.If you know that the actual prices one year from now are stock X $55,stock Y $52,and stock Z $57,then

Accepted Answer

A)  stock X is undervalued, stock Y is undervalued, stock Z is undervalued. 
B)  stock X is undervalued, stock Y is overvalued, stock Z is overvalued. 
C)  stock X is overvalued, stock Y is undervalued, stock Z is undervalued. 
D)  stock X is undervalued, stock Y is overvalued, stock Z is undervalued. 
E)  stock X is overvalued, stock Y is overvalued, stock Z is undervalued. 
A)  stock X is undervalued, stock Y is undervalued, stock Z is undervalued. 
B)  stock X is undervalued, stock Y is overvalued, stock Z is overvalued. 
C)  stock X is overvalued, stock Y is undervalued, stock Z is undervalued. 
D)  stock X is undervalued, stock Y is overvalued, stock Z is undervalued. 
E)  stock X is overvalued, stock Y is overvalued, stock Z is undervalued.

Question 5

In a macro-economic based risk factor model the following factor would be one of many appropriate factors:

Accepted Answer

A)  Confidence risk. 
B)  Maturity risk. 
C)  Expected inflation risk. 
D)  Call risk. 
E)  Return difference between small capitalization and large capitalization stocks. 
A)  Confidence risk. 
B)  Maturity risk. 
C)  Expected inflation risk. 
D)  Call risk. 
E)  Return difference between small capitalization and large capitalization stocks.

Question 6

Under the following conditions,what are the expected returns for stocks X and Y?
$\begin{array}{ll}
\lambda^{0}=0.05 & b_{x, 1}=0.90 \
k_{1}=0.03 & b_{x, 2}=1.60 \
k_{2}=0.04 & b_{\mathrm{y}, 1}=1.50 \
& b_{\mathrm{v}, 2}=0.85
\end{array}$

Accepted Answer

A)  14.1% and 12.9% 
B)  12.5% and 19.5% 
C)  19.5% and 18.5% 
D)  21.2% and 18.5% 
E)  None of the above 
A)  14.1% and 12.9% 
B)  12.5% and 19.5% 
C)  19.5% and 18.5% 
D)  21.2% and 18.5% 
E)  None of the above

Question 7

Exhibit 9.2
Use the Information Below for the Following Problem(S)
Consider the three stocks, stock X, stock Y and stock Z, that have the following factor loadings (or factor betas).
 $$\begin{array} { c c c } 
\text { Stack } & \text { Factor 1 Londine } & \text { Factor } 2 \text { Londing } \
\hline X & - [ .55 & 1.2 \
Y & - [ .10 & 0.85 \
Z & 0.35 & 0.5
\end{array}$$ 
The zero-beta return (??) = 3%, and the risk premia are ?? = 10%, ?? = 8%. Assume that all three stocks are currently priced at $50.
-Refer to Exhibit 9.2.Assume that you wish to create a portfolio with no net wealth invested.The portfolio that achieves this has 50% in stock X,-100% in stock Y,and 50% in stock Z.The weighted exposure to risk factor 1 for stocks X,Y,and Z are

Accepted Answer

A)  0.50, -1.0, 0.50 
B)  -0.50, 1.0, -0.50 
C)  0.60, -0.85, 0.25 
D)  -0.275, 0.10, 0.175 
E)  None of the above. 
A)  0.50, -1.0, 0.50 
B)  -0.50, 1.0, -0.50 
C)  0.60, -0.85, 0.25 
D)  -0.275, 0.10, 0.175 
E)  None of the above.

Question 8

In a multifactor model,confidence 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.

Question 9

Exhibit 9.3
Use the Information Below for the Following Problem(S)
Stocks A, B, and C have two risk factors with the following beta coefficients. The zero-beta return (??) = .025 and the risk premiums for the two factors are (??) = .12 and (??) = .10.
 $$\begin{array} { c c c } 
\text { Stack } & \text { Factor } 1 w _ { i 1 } & \text { Factor } 2 w _ { i 2 } \
\hline \mathrm { A } & - 0.25 & 1.1 \
\mathrm {~B} & - 0.05 & 0.9 \
\mathrm { C } & 0.01 & 0.6
\end{array}$$
-Refer to Exhibit 9.3.Assume that stocks A,B,and C never pay dividends and stocks A,B,and C are currently trading at $10,$20,and $30,respectively.What is the expected price next year for each stock?
&ensp;&ensp;&ensp;&ensp;&ensp;A&ensp;&ensp;&ensp;&ensp;&ensp;B&ensp;&ensp;&ensp;&ensp; C

Accepted Answer

A)  $10.82&ensp; $21.82&ensp; $30.99 
B)  $11.05 &ensp;$22.18&ensp; $30.96 
C)  $11.32 &ensp;$22.56 &ensp;$30.99 
D)  $11.65&ensp; $22.42 &ensp;$30.96 
E)  $18.50 &ensp;$37.00 &ensp;$48.30 
A)  $10.82&ensp; $21.82&ensp; $30.99 
B)  $11.05 &ensp;$22.18&ensp; $30.96 
C)  $11.32 &ensp;$22.56 &ensp;$30.99 
D)  $11.65&ensp; $22.42 &ensp;$30.96 
E)  $18.50 &ensp;$37.00 &ensp;$48.30

Question 10

The excess return form of the single-index market model is

Accepted Answer

A)  Rit =α + b(Rmt - Rit) + eit 
B)  RFRt = α + b(Rmt - RFRt) + eit 
C)  Rit - RFRt = α + b(Rmt) + eit 
D)  Rit = α + b(Rmt - RFRt) + eit 
E)  Rit - RFRt = α + b(Rmt - RFRt) + eit 
A)  Rit =α + b(Rmt - Rit) + eit 
B)  RFRt = α + b(Rmt - RFRt) + eit 
C)  Rit - RFRt = α + b(Rmt) + eit 
D)  Rit = α + b(Rmt - RFRt) + eit 
E)  Rit - RFRt = α + b(Rmt - RFRt) + eit

Question 11

Which of the following is not a step required for a multifactor risk model to estimate expected return for an individual stock position?

Accepted Answer

A)  Identify a set of K common risk factors. 
B)  Estimate the risk premia for the factors. 
C)  Estimate the sensitivities of the each stock to these K factors. 
D)  Calculate the expected returns using linear programming analysis. 
E)  All of the above are necessary steps for a multifactor risk model. 
A)  Identify a set of K common risk factors. 
B)  Estimate the risk premia for the factors. 
C)  Estimate the sensitivities of the each stock to these K factors. 
D)  Calculate the expected returns using linear programming analysis. 
E)  All of the above are necessary steps for a multifactor risk model.

Question 12

The APT does not require a market portfolio.

Accepted Answer

A) True 
 B)False

Question 13

Exhibit 9.1
Use the Information Below for the Following Problem(S)
(1) Capital markets are perfectly competitive.
(2) Quadratic utility function.
(3) Investors prefer more wealth to less wealth with certainty.
(4) Normally distributed security returns.
(5) Representation as a K factor model.
(6) A market portfolio that is mean-variance efficient.
-Refer to Exhibit 9.1.In the list above,which are not assumptions of the Arbitrage Pricing model?

Accepted Answer

A)  (1) and (3) 
B)  (1), (2), and (3) 
C)  (1), (2), and (5) 
D)  (2), (4), and (6) 
E)  All six are assumptions 
A)  (1) and (3) 
B)  (1), (2), and (3) 
C)  (1), (2), and (5) 
D)  (2), (4), and (6) 
E)  All six are assumptions

Question 14

Consider a two-factor APT model where the first factor is changes in the 30-year T-bond rate,and the second factor is the percent growth in GNP.Based on historical estimates you determine that the risk premium for the interest rate factor is 0.02,and the risk premium on the GNP factor is 0.03.For a particular asset,the response coefficient for the interest rate factor is -1.2,and the response coefficient for the GNP factor is 0.80.The rate of return on the zero-beta asset is 0.03.Calculate the expected return for the asset.

Accepted Answer

A)  5.0% 
B)  2.4% 
C)  -3.0% 
D)  -2.4% 
E)  3.0% 
A)  5.0% 
B)  2.4% 
C)  -3.0% 
D)  -2.4% 
E)  3.0%

Question 15

Studies strongly suggest that the CAPM be abandoned and replaced with the APT.

Accepted Answer

A) True 
 B)False

Question 16

Cho,Elton,and Gruber tested the APT by examining the number of factors in the return generating process and found that

Accepted Answer

A)  Five factors were required using Roll-Ross procedures. 
B)  Six factors were present when using historical beta. 
C)  Fundamental betas indicated a need for three factors. 
D)  All of the above. 
E)  None of the above. 
A)  Five factors were required using Roll-Ross procedures. 
B)  Six factors were present when using historical beta. 
C)  Fundamental betas indicated a need for three factors. 
D)  All of the above. 
E)  None of the above.

Question 17

In the APT model the idea of riskless arbitrage is to assemble a portfolio that

Accepted Answer

A)  requires some initial wealth, will bear no risk, and still earn a profit. 
B)  requires no initial wealth, will bear no risk, and still earn a profit. 
C)  requires no initial wealth, will bear no systematic risk, and still earn a profit. 
D)  requires no initial wealth, will bear no unsystematic risk, and still earn a profit. 
E)  requires some initial wealth, will bear no systematic risk, and still earn a profit. 
A)  requires some initial wealth, will bear no risk, and still earn a profit. 
B)  requires no initial wealth, will bear no risk, and still earn a profit. 
C)  requires no initial wealth, will bear no systematic risk, and still earn a profit. 
D)  requires no initial wealth, will bear no unsystematic risk, and still earn a profit. 
E)  requires some initial wealth, will bear no systematic risk, and still earn a profit.

Question 18

Exhibit 9.2
Use the Information Below for the Following Problem(S)
Consider the three stocks, stock X, stock Y and stock Z, that have the following factor loadings (or factor betas).
 $$\begin{array} { c c c } 
\text { Stack } & \text { Factor 1 Londine } & \text { Factor } 2 \text { Londing } \
\hline X & - [ .55 & 1.2 \
Y & - [ .10 & 0.85 \
Z & 0.35 & 0.5
\end{array}$$ 
The zero-beta return (??) = 3%, and the risk premia are ?? = 10%, ?? = 8%. Assume that all three stocks are currently priced at $50.
-Refer to Exhibit 9.2.The expected prices one year from now for stocks X,Y,and Z are

Accepted Answer

A)  $53.55, $54.4, $55.25 
B)  $45.35, $54.4, $55.25 
C)  $55.55, $56.35, $57.15 
D)  $50, $50, $50 
E)  $51.35, $47.79, $51.58. 
A)  $53.55, $54.4, $55.25 
B)  $45.35, $54.4, $55.25 
C)  $55.55, $56.35, $57.15 
D)  $50, $50, $50 
E)  $51.35, $47.79, $51.58.

Question 19

In a micro-economic (or characteristic)based risk factor model the following factor would be one of many appropriate factors:

Accepted Answer

A)  Confidence risk. 
B)  Maturity risk. 
C)  Expected inflation risk. 
D)  Call risk. 
E)  Return difference between small capitalization and large capitalization stocks. 
A)  Confidence risk. 
B)  Maturity risk. 
C)  Expected inflation risk. 
D)  Call risk. 
E)  Return difference between small capitalization and large capitalization stocks.

Question 20

Under the following conditions,what are the expected returns for stocks A and B?
$\begin{array}{ll}
\lambda^{0}=0.03 & \mathrm{~b}_{\mathrm{a}, 1}=1.5 \
\mathrm{k}_{1}=0.09 & \mathrm{~b}_{\mathrm{a}, 2}=0.8 \
\mathrm{k}_{2}=0.07 & \mathrm{~b}_{\mathrm{b}, 1}=1.20 \
& \mathrm{~b}_{\mathrm{b}, 2}=0.6
\end{array}$

Accepted Answer

A)  24.8% and 19.7% 
B)  22.1% and 18.0% 
C)  20.3% and 17.8% 
D)  19.9% and 16.9% 
E)  18.7% and 15.3% 
A)  24.8% and 19.7% 
B)  22.1% and 18.0% 
C)  20.3% and 17.8% 
D)  19.9% and 16.9% 
E)  18.7% and 15.3%

Exam 9: Multifactor Models of Risk and Return

In the APT model,the identity of all the factors is known.

One method for estimating the parameters for the Capital Asset Pricing Model is to estimate a portfolio's characteristic line via regression techniques using the single-index market model.

Consider the following two factor APT model E(R)= ?? + ??b? + ??b?

In a macro-economic based risk factor model the following factor would be one of many appropriate factors:

Under the following conditions,what are the expected returns for stocks X and Y? =0.05 =0.90 =0.03 =1.60 =0.04 =1.50 =0.85

In a multifactor model,confidence risk represents

The excess return form of the single-index market model is

Which of the following is not a step required for a multifactor risk model to estimate expected return for an individual stock position?

The APT does not require a market portfolio.

Studies strongly suggest that the CAPM be abandoned and replaced with the APT.

Cho,Elton,and Gruber tested the APT by examining the number of factors in the return generating process and found that

In the APT model the idea of riskless arbitrage is to assemble a portfolio that

In a micro-economic (or characteristic)based risk factor model the following factor would be one of many appropriate factors:

Under the following conditions,what are the expected returns for stocks A and B? =0.03 =1.5 =0.09 =0.8 =0.07 =1.20 =0.6

An Overview of the Investment Process

The Asset Allocation Decision

The Global Market Investment Decision

Securities Markets: Organization and Operation

Security-Market Indexes

Efficient Capital Markets

An Introduction to Portfolio Management

An Introduction to Asset Pricing Models

Analysis of Financial Statements

Security Valuation Principles

Macroanalysis and Microvaluation of the Stock Market

Industry Analysis

Company Analysis and Stock Valuation

Equity Portfolio Management Stragtegies

Technical Analysis

Bond Fundamentals

The Analysis and Valuation of Bonds

Bond Portfolio Management Strategies

An Introduction to Derivative Markets and Securities

Forward and Futures Contracts

Option Contracts

Swap Contracts,convertible Securities,and Other Embedded Derivatives

Professional Money Management, alternative Assets, and Industry Ethics

Evaluation of Portfolio Performance

Investment Return and Risk Analysis Questions

Investment and Retirement Plans

Calculating Covariance and Correlation Coefficient of Assets

Portfolio Variance and Stock Weight Calculations

Portfolio Optimization with Negative Correlation: Finding Minimum Variance and Weight Allocation

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