Exam 8: The Efficient Market Hypothesis

Consider the multifactor APT with two factors.The risk premiums on the factor 1 and factor 2 portfolios are 5% and 6%,respectively.Stock A has a beta of 1.2 on factor 1,and a beta of 0.7 on factor 2.The expected return on stock A is 17%.If no arbitrage opportunities exist,the risk-free rate of return is ______________.

Assume that stock market returns do follow a single-index structure.An investment fund analyzes 500 stocks in order to construct a mean-variance efficient portfolio constrained by 500 investments.They will need to calculate ________ estimates of firm-specific variances and ________ estimates for the variance of the macroeconomic factor.

If a firm's beta was calculated as 1.3 in a regression equation,a commonly used adjustment technique would provide an adjusted beta of

Multifactor models such as the one constructed by Chen,Roll,and Ross,can better describe assets' returns by

Assume that stock market returns do not resemble a single-index structure.An investment fund analyzes 100 stocks in order to construct a mean-variance efficient portfolio constrained by 100 investments.They will need to calculate ____________ covariances.

The APT differs from the CAPM because the APT _________.

If arbitrage opportunities are to be ruled out,each well-diversified portfolio's expected excess return must be

To determine stock beta estimates,BMO Nesbitt Burns uses the __________ as a proxy for the market portfolio.

Discuss the advantages of the single-index model over the Markowitz model in terms of numbers of variable estimates required and in terms of understanding risk relationships.

Assume that stock market returns do not resemble a single-index structure.An investment fund analyzes 150 stocks in order to construct a mean-variance efficient portfolio constrained by 150 investments.They will need to calculate ____________ covariances.

Consider the single-factor APT.Stocks A and B have expected returns of 15% and 18%,respectively.The risk-free rate of return is 6%.Stock B has a beta of 1.0.If arbitrage opportunities are ruled out,stock A has a beta of __________.

The following factors might affect stock returns:

The APT requires a benchmark portfolio

In developing the APT,Ross assumed that uncertainty in asset returns was a result of

Consider a well-diversified portfolio,A,in a two-factor economy.The risk-free rate is 6%,the risk premium on the first factor portfolio is 4% and the risk premium on the second factor portfolio is 3%.If portfolio A has a beta of 1.2 on the first factor and .8 on the second factor,what is its expected return?

Consider the multifactor APT with two factors.Stock A has an expected return of 16.4%,a beta of 1.4 on factor 1 and a beta of .8 on factor 2.The risk premium on the factor 1 portfolio is 3%.The risk-free rate of return is 6%.What is the risk-premium on factor 2 if no arbitrage opportunities exit?

The Security Characteristic Line (SCL)

According to the index model,covariances among security pairs are

Discuss the similarities and the differences between the CAPM and the APT with regard to the following factors: capital market equilibrium,assumptions about risk aversion,risk-return dominance,and the number of investors required to restore equilibrium.

The exploitation of security mispricing in such a way that risk-free economic profits may be earned is called ___________.