Exam 10: Arbitrage Pricing Theory and Multifactor Models of Risk and Return

Imposing the no-arbitrage condition on a single-factor security market implies which of the following statements I. The expected return-beta relationship is maintained for all but a small number of well-diversified portfolios. II. The expected return-beta relationship is maintained for all well-diversified portfolios. III. The expected return-beta relationship is maintained for all but a small number of individual securities. IV. The expected return-beta relationship is maintained for all individual securities.

The APT differs from the CAPM because the APT

In a multifactor APT model, the coefficients on the macro factors are often called

Discuss arbitrage opportunities in the context of violations of the law of one price.

Consider the one-factor APT.The variance of returns on the factor portfolio is 6%.The beta of a well-diversified portfolio on the factor is 1.1.The variance of returns on the well-diversified portfolio is approximately

Consider the one-factor APT.The standard deviation of returns on a well-diversified portfolio is 22%.The standard deviation on the factor portfolio is 14%.The beta of the well-diversified portfolio is approximately

A _________ portfolio is a well-diversified portfolio constructed to have a beta of 1 on one of the factors and a beta of 0 on any other factor.

In the APT model, what is the nonsystematic standard deviation of an equally weighted portfolio that has an average value of σ(e_i) equal to 18% and 250 securities

Which of the following is(are) true regarding the APT I. The security market line does not apply to the APT. II. More than one factor can be important in determining returns. III. Almost all individual securities satisfy the APT relationship. IV. It doesn't rely on the market portfolio that contains all assets.

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

A professional who searches for mispriced securities in specific areas such as merger-target stocks, rather than one who seeks strict (risk-free) arbitrage opportunities is engaged in

The factor F in the APT model represents

The ____________ provides an unequivocal statement on the expected return-beta relationship for all assets, whereas the _____________ implies that this relationship holds for all but perhaps a small number of securities.

Consider a single factor APT.Portfolio A has a beta of 1.0 and an expected return of 16%.Portfolio B has a beta of 0.8 and an expected return of 12%.The risk-free rate of return is 6%.If you wanted to take advantage of an arbitrage opportunity, you should take a short position in portfolio __________ and a long position in portfolio _______.

Which of the following is true about the security market line (SML) derived from the APT

Consider the one-factor APT.The variance of returns on the factor portfolio is 11%.The beta of a well-diversified portfolio on the factor is 1.45.The variance of returns on the well-diversified portfolio is approximately

The term "arbitrage" refers to

Consider the multifactor APT.There are two independent economic factors, F₁ and F₂.The risk-free rate of return is 6%.The following information is available about two well-diversified portfolios: Assuming no arbitrage opportunities exist, the risk premium on the factor F₁ portfolio should be

In a multifactor APT model, the coefficients on the macro factors are often called

Consider the one-factor APT.The standard deviation of returns on a well-diversified portfolio is 19%.The standard deviation on the factor portfolio is 12%.The beta of the well-diversified portfolio is approximately