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

Consider a single factor APT.Portfolio A has a beta of 2.0 and an expected return of 22%.Portfolio B has a beta of 1.5 and an expected return of 17%.The risk-free rate of return is 4%.If you wanted to take advantage of an arbitrage opportunity, you should take a short position in portfolio __________ and a long position in portfolio _______.

There are three stocks, A, B, and C,You can either invest in these stocks or short sell them.There are three possible states of nature for economic growth in the upcoming year (each equally likely to occur); economic growth may be strong, moderate, or weak.The returns for the upcoming year on stocks A, B, and C for each of these states of nature are given below:

Which of the following factors did Chen, Roll, and Ross not include in their multifactor model

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 25% and 50 securities

Consider the single-factor APT.Stocks A and B have expected returns of 12% and 14%, respectively.The risk-free rate of return is 5%.Stock B has a beta of 1.2.If arbitrage opportunities are ruled out, stock A has a beta of

Consider the one-factor APT.Assume that two portfolios, A and B, are well diversified.The betas of portfolios A and B are 1.0 and 1.5, respectively.The expected returns on portfolios A and B are 19% and 24%, respectively.Assuming no arbitrage opportunities exist, the risk-free rate of return must be

Portfolio A has expected return of 10% and standard deviation of 19%.Portfolio B has expected return of 12% and standard deviation of 17%.Rational investors will

Consider the multifactor APT with two factors.Stock A has an expected return of 17.6%, a beta of 1.45 on factor 1, and a beta of .86 on factor 2.The risk premium on the factor 1 portfolio is 3.2%.The risk-free rate of return is 5%.What is the risk-premium on factor 2 if no arbitrage opportunities exist

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

There are three stocks, A, B, and C,You can either invest in these stocks or short sell them.There are three possible states of nature for economic growth in the upcoming year (each equally likely to occur); economic growth may be strong, moderate, or weak.The returns for the upcoming year on stocks A, B, and C for each of these states of nature are given below:

Discuss the advantages of arbitrage pricing theory (APT) over the capital asset pricing model (CAPM) relative to diversified portfolios.

Security A has a beta of 1.0 and an expected return of 12%.Security B has a beta of 0.75 and an expected return of 11%.The risk-free rate is 6%.Explain the arbitrage opportunity that exists; explain how an investor can take advantage of it.Give specific details about how to form the portfolio, what to buy and what to sell. B.The investor can accomplish this by choosing .75 as the weight in A and .25 in the risk-free asset.This portfolio would have E(r_p) = 0.75(12%) + 0.25(6%) = 10.5%, which is less than B's 11% expected return.The investor should buy B and finance the purchase by short selling A and borrowing at the risk-free asset.Feedback: The student can apply arbitrage principles.

In a factor model, the return on a stock in a particular period will be related to

Suppose you are working with two factor portfolios, portfolio 1 and portfolio 2.The portfolios have expected returns of 15% and 6%, respectively.Based on this information, what would be the expected return on well-diversified portfolio A, if A has a beta of 0.80 on the first factor and 0.50 on the second factor The risk-free rate is 3%.

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 F₂ portfolio should be

An arbitrage opportunity exists if an investor can construct a __________ investment portfolio that will yield a sure profit.

Which of the following factors did Chen, Roll, and Ross include in their multifactor model

The following factors might affect stock returns

Which of the following factors were used by Fama and French in their multifactor model

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 20% and 40 securities