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

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

If the expected rate of inflation was 3% and the actual rate was 6.2%; the systematic response coefficient from inflation,β_I,would result in a change in any security return of ___ β_I.

Style portfolios are characterized by:

A value company is defined as one that:

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 β_EX = 1.8,β_I = 0.7,and β_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.

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

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

Discuss the Fama-French three factor model; both what it means and the factors of the model.

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 β_EX = 1.8,β_I = 0.7,and β_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.

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

The systematic response coefficient for productivity,β_p,would produce an unexpected change in any security return of ____ β_P if the expected rate of productivity was 1.5% and the actual rate was 2.25%.

Which of the following statements is true?

A factor is a variable that:

Parametric or empirical models rely on:

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?

An investor is considering the three stocks given below: Calculate the expected return and beta of a portfolio equally weighted between stocks B and 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 stocks B and A.

An advantage of the APT over CAPM is:

Assume that the single factor APT model applies and a portfolio exists such that 1/2 of the funds are invested in Security Q and the rest in the risk-free asset. Security Q has a beta of 1.8. The portfolio has a beta of:

A growth stock portfolio and a value portfolio might be characterized:

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