Question 1

The Fama-French three factor model includes the following factors:

Accepted Answer

A)  beta, expected return on the market, risk free rate of interest, a size factor, and a value factor. 
B)  the market risk premium, a volume factor, and a size factor. 
C)  beta, expected return on the market, risk free rate of interest, a volume factor, and a value factor. 
D)  the yield on corporate bonds, a size factor, and a market factor. 
E)  None of these. 
A)  beta, expected return on the market, risk free rate of interest, a size factor, and a value factor. 
B)  the market risk premium, a volume factor, and a size factor. 
C)  beta, expected return on the market, risk free rate of interest, a volume factor, and a value factor. 
D)  the yield on corporate bonds, a size factor, and a market factor. 
E)  None of these.

Question 2

The systematic response coefficient for productivity,βp,would produce an unexpected change in any security return of __ βP if the expected rate of productivity was 1.8% and the actual rate was 2.3%.

Accepted Answer

A)  0.5% 
B)  -0.5% 
C)  2.3% 
D)  -2.3% 
E)  1.8% 
A)  0.5% 
B)  -0.5% 
C)  2.3% 
D)  -2.3% 
E)  1.8%

Question 3

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. 
E)  None of these. 
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. 
E)  None of these.

Question 4

Explain the conceptual differences in the theoretical development of the CAPM and APT.

Accepted Answer

CAPM depends on the efficient set and in

Question 5

What would not be true about a GNP beta?

Accepted Answer

A)  If a stock's β GNP = 1.5, the stock will experience a 1.5% increase for every 1% surprise increase in GNP. 
B)  If a stock's β GNP = -1.5, the stock will experience a 1.5% decrease for every 1% surprise increase in GNP. 
C)  It is a measure of risk. 
D)  It measures the impact of systematic risk associated with GNP. 
E)  None of these. 
A)  If a stock's β GNP = 1.5, the stock will experience a 1.5% increase for every 1% surprise increase in GNP. 
B)  If a stock's β GNP = -1.5, the stock will experience a 1.5% decrease for every 1% surprise increase in GNP. 
C)  It is a measure of risk. 
D)  It measures the impact of systematic risk associated with GNP. 
E)  None of these.

Question 6

Suppose the Binder Corporation's common stock has a return of 17%. Assume the risk-free rate is 5%,the expected market return is 8%,and no unsystematic influence affected Binder's return. The beta for Binder is:

Accepted Answer

A)  0. 
B)  2. 
C)  3. 
D)  4. 
E)  It is impossible to calculate beta without the inflation ratE. 17 = 5 + β(8 - 5); β = 4 
A)  0. 
B)  2. 
C)  3. 
D)  4. 
E)  It is impossible to calculate beta without the inflation ratE. 17 = 5 + β(8 - 5); β = 4

Question 7

The betas along with the factors in the APT adjust the expected return for:

Accepted Answer

A)  calculation errors. 
B)  unsystematic risks. 
C)  spurious correlations of factors. 
D)  differences between actual and expected levels of factors. 
E)  All of 
A)  calculation errors. 
B)  unsystematic risks. 
C)  spurious correlations of factors. 
D)  differences between actual and expected levels of factors. 
E)  All of

Question 8

In the one factor (APT) model,the characteristic line to estimate βi passes through the origin,unlike the estimate used in the CAPM because:

Accepted Answer

A)  the relationship is between the actual return on a security and the market index. 
B)  the relationship measures the change in the security return over time versus the change in the market return. 
C)  the relationship measures the change in excess return on a security versus GNP. 
D)  the relationship measures the change in excess return on a security versus the return on the factor about its mean of zero. 
E)  Cannot be determined without actual data. 
A)  the relationship is between the actual return on a security and the market index. 
B)  the relationship measures the change in the security return over time versus the change in the market return. 
C)  the relationship measures the change in excess return on a security versus GNP. 
D)  the relationship measures the change in excess return on a security versus the return on the factor about its mean of zero. 
E)  Cannot be determined without actual data.

Question 9

The most realistic APT model would likely include:

Accepted Answer

A)  multiple factors. 
B)  only one factor. 
C)  a factor to measure inflation. 
D)  Both multiple factors; and a factor to measure inflation. 
E)  Both only one factor; and a factor to measure inflation. 
A)  multiple factors. 
B)  only one factor. 
C)  a factor to measure inflation. 
D)  Both multiple factors; and a factor to measure inflation. 
E)  Both only one factor; and a factor to measure inflation.

Question 10

Suppose the JumpStart Corporation's common stock has a beta of 0.8. If the risk-free rate is 4% and the expected market return is 9%,the expected return for JumpStart's common stock is:

Accepted Answer

A)  3.2%. 
B)  4.0%. 
C)  7.2%. 
D)  8.0%. 
E)  9.0%. 
A)  3.2%. 
B)  4.0%. 
C)  7.2%. 
D)  8.0%. 
E)  9.0%.

Question 11

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

Accepted Answer

A)  all 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 -1. 
D)  the systematic risk of companies R and T is unrelated. 
E)  None of these. 
A)  all 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 -1. 
D)  the systematic risk of companies R and T is unrelated. 
E)  None of these.

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

The Fama-French three factor model includes the following factors:

The systematic response coefficient for productivity,βp,would produce an unexpected change in any security return of __ βP if the expected rate of productivity was 1.8% and the actual rate was 2.3%.

Systematic risk is defined as:

Explain the conceptual differences in the theoretical development of the CAPM and APT.

What would not be true about a GNP beta?

Suppose the Binder Corporation's common stock has a return of 17%. Assume the risk-free rate is 5%,the expected market return is 8%,and no unsystematic influence affected Binder's return. The beta for Binder is:

The betas along with the factors in the APT adjust the expected return for:

In the one factor (APT) model,the characteristic line to estimate βi passes through the origin,unlike the estimate used in the CAPM because:

The most realistic APT model would likely include:

Suppose the JumpStart Corporation's common stock has a beta of 0.8. If the risk-free rate is 4% and the expected market return is 9%,the expected return for JumpStart's common stock is:

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

Introduction to Corporate Finance

Financial Statements and Cash Flow

Financial Statements Analysis and Financial Models

Discounted Cash Flow Valuation

Net Present Value and Other Investment Rules

Making Capital Investment Decisions

Risk Analysis, Real Options, and Capital Budgeting

Interest Rates and Bond Valuation

Stock Valuation

Risk and Return: Lessons From Market History

Return and Risk: the Capital Asset Pricing Model Capm

Risk, Cost of Capital, and Valuation

Efficient Capital Markets and Behavioral Challenges

Long-Term Financing

Capital Structure: Basic Concepts

Capital Structure: Limits to the Use of Debt

Valuation and Capital Budgeting for the Levered Firm

Dividends and Other Payouts

Raising Capital

Leasing

Options and Corporate Finance

Options and Corporate Finance: Extensions and Applications

Warrants and Convertibles

Derivatives and Hedging Risk

Short-Term Finance and Planning

Cash Management

Credit and Inventory Management

Mergers, Acquisitions, and Divestitures

Financial Distress

International Corporate Finance

Filters

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 1.8% and the actual rate was 2.3%.

In the one factor (APT) model,the characteristic line to estimate β_i passes through the origin,unlike the estimate used in the CAPM because: