Question 1

In terms of the risk/return relationship in the APT,

Accepted Answer

A) only factor risk commands a risk premium in market equilibrium. 
B) only systematic risk is related to expected returns. 
C) only nonsystematic risk is related to expected returns. 
D) only factor risk commands a risk premium in market equilibrium and only systematic risk is related to expected returns. 
E) only factor risk commands a risk premium in market equilibrium and only nonsystematic risk is related to expected returns. 
A) only factor risk commands a risk premium in market equilibrium. 
B) only systematic risk is related to expected returns. 
C) only nonsystematic risk is related to expected returns. 
D) only factor risk commands a risk premium in market equilibrium and only systematic risk is related to expected returns. 
E) only factor risk commands a risk premium in market equilibrium and only nonsystematic risk is related to expected returns.

Question 2

Consider the multifactor APT.The risk premiums on the factor 1 and factor 2 portfolios are 5% and 3%, respectively.The risk-free rate of return is 10%.Stock A has an expected return of 19% and a beta on factor 1 of 0.8.Stock A has a beta on factor 2 of

Accepted Answer

A) 1.33. 
B) 1.50. 
C) 1.67. 
D) 2.00. 
A) 1.33. 
B) 1.50. 
C) 1.67. 
D) 2.00.

Question 3

Consider a well-diversified portfolio, A, in a two-factor economy.The risk-free rate is 5%, the risk premium on the first factor portfolio is 4% and the risk premium on the second factor portfolio is 6%.If portfolio A has a beta of 0.6 on the first factor and 1.8 on the second factor, what is its expected return

Accepted Answer

A) 7.0% 
B) 8.0% 
C) 18.2% 
D) 13.0% 
E) 13.2% 
A) 7.0% 
B) 8.0% 
C) 18.2% 
D) 13.0% 
E) 13.2%

Question 4

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

Accepted Answer

A) systemic risk. 
B) factor sensitivities. 
C) idiosyncratic risk. 
D) factor betas. 
E) factor sensitivities and factor betas. 
A) systemic risk. 
B) factor sensitivities. 
C) idiosyncratic risk. 
D) factor betas. 
E) factor sensitivities and factor betas.

Question 5

The APT was developed in 1976 by

Accepted Answer

A) Lintner. 
B) Modigliani and Miller. 
C) Ross. 
D) Sharpe. 
A) Lintner. 
B) Modigliani and Miller. 
C) Ross. 
D) Sharpe.

Question 6

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

Accepted Answer

A) a common macroeconomic factor. 
B) firm-specific factors. 
C) pricing error. 
D) a common macroeconomic factor and firm-specific factors. 
A) a common macroeconomic factor. 
B) firm-specific factors. 
C) pricing error. 
D) a common macroeconomic factor and firm-specific factors.

Question 7

Consider the one-factor APT.The standard deviation of returns on a well-diversified portfolio is 18%.The standard deviation on the factor portfolio is 16%.The beta of the well-diversified portfolio is approximately

Accepted Answer

A) 0.80. 
B) 1.13. 
C) 1.25. 
D) 1.56. 
A) 0.80. 
B) 1.13. 
C) 1.25. 
D) 1.56.

Question 8

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

Accepted Answer

A) inversely proportional to the risk-free rate. 
B) inversely proportional to its standard deviation. 
C) proportional to its weight in the market portfolio. 
D) proportional to its standard deviation. 
E) proportional to its beta coefficient. 
A) inversely proportional to the risk-free rate. 
B) inversely proportional to its standard deviation. 
C) proportional to its weight in the market portfolio. 
D) proportional to its standard deviation. 
E) proportional to its beta coefficient.

Question 9

A zero-investment portfolio with a positive expected return arises when

Accepted Answer

A) an investor has downside risk only. 
B) the law of prices is not violated. 
C) the opportunity set is not tangent to the capital allocation line. 
D) a risk-free arbitrage opportunity exists. 
A) an investor has downside risk only. 
B) the law of prices is not violated. 
C) the opportunity set is not tangent to the capital allocation line. 
D) a risk-free arbitrage opportunity exists.

Question 10

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

Accepted Answer

A) 6.0%. 
B) 6.5%. 
C) 6.8%. 
D) 7.4%. 
A) 6.0%. 
B) 6.5%. 
C) 6.8%. 
D) 7.4%.

Question 11

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:

Accepted Answer

A) A, B and C 
B) B, A and C 
C) C, A and B 
D) A and B, C 
A) A, B and C 
B) B, A and C 
C) C, A and B 
D) A and B, C

Question 12

Consider the multifactor model APT with two factors.Portfolio A has a beta of 0.75 on factor 1 and a beta of 1.25 on factor 2.The risk premiums on the factor 1 and factor 2 portfolios are 1% and 7%, respectively.The risk-free rate of return is 7%.The expected return on portfolio A is __________ if no arbitrage opportunities exist.

Accepted Answer

A) 13.5% 
B) 15.0% 
C) 16.5% 
D) 23.0% 
A) 13.5% 
B) 15.0% 
C) 16.5% 
D) 23.0%

Question 13

Black argues that past risk premiums on firm-characteristic variables, such as those described by Fama and French, are problematic because

Accepted Answer

A) they may result from data snooping. 
B) they are sources of systematic risk. 
C) they can be explained by security characteristic lines. 
D) they are more appropriate for a single-factor model. 
E) they are macroeconomic factors. 
A) they may result from data snooping. 
B) they are sources of systematic risk. 
C) they can be explained by security characteristic lines. 
D) they are more appropriate for a single-factor model. 
E) they are macroeconomic factors.

Question 14

Consider the multifactor model APT with three factors.Portfolio A has a beta of 0.8 on factor 1, a beta of 1.1 on factor 2, and a beta of 1.25 on factor 3.The risk premiums on the factor 1, factor 2, and factor 3 are 3%, 5%, and 2%, respectively.The risk-free rate of return is 3%.The expected return on portfolio A is __________ if no arbitrage opportunities exist.

Accepted Answer

A) 13.5% 
B) 13.4% 
C) 16.5% 
D) 23.0% 
A) 13.5% 
B) 13.4% 
C) 16.5% 
D) 23.0%

Question 15

Consider a one-factor economy.Portfolio A has a beta of 1.0 on the factor and portfolio B has a beta of 2.0 on the factor.The expected returns on portfolios A and B are 11% and 17%, respectively.Assume that the risk-free rate is 6% and that arbitrage opportunities exist.Suppose you invested $100,000 in the risk-free asset, $100,000 in portfolio B, and sold short $200,000 of portfolio A.Your expected profit from this strategy would be

Accepted Answer

A) -$1,000. 
B) $0. 
C) $1,000. 
D) $2,000. 
A) -$1,000. 
B) $0. 
C) $1,000. 
D) $2,000.

Question 16

The feature of the APT that offers the greatest potential advantage over the CAPM is the

Accepted Answer

A) use of several factors instead of a single market index to explain the risk-return relationship. 
B) identification of anticipated changes in production, inflation, and term structure as key factors in explaining the risk-return relationship. 
C) superior measurement of the risk-free rate of return over historical time periods. 
D) variability of coefficients of sensitivity to the APT factors for a given asset over time. 
E) None of the options 
A) use of several factors instead of a single market index to explain the risk-return relationship. 
B) identification of anticipated changes in production, inflation, and term structure as key factors in explaining the risk-return relationship. 
C) superior measurement of the risk-free rate of return over historical time periods. 
D) variability of coefficients of sensitivity to the APT factors for a given asset over time. 
E) None of the options

Question 17

The APT requires a benchmark portfolio

Accepted Answer

A) that is equal to the true market portfolio. 
B) that contains all securities in proportion to their market values. 
C) that need not be well-diversified. 
D) that is well-diversified and lies on the SML. 
E) that is unobservable. 
A) that is equal to the true market portfolio. 
B) that contains all securities in proportion to their market values. 
C) that need not be well-diversified. 
D) that is well-diversified and lies on the SML. 
E) that is unobservable.

Question 18

Consider the single factor APT.Portfolios A and B have expected returns of 14% and 18%, respectively.The risk-free rate of return is 7%.Portfolio A has a beta of 0.7.If arbitrage opportunities are ruled out, portfolio B must have a beta of

Accepted Answer

A) 0.45. 
B) 1.00. 
C) 1.10. 
D) 1.22. 
E) None of the options 
A) 0.45. 
B) 1.00. 
C) 1.10. 
D) 1.22. 
E) None of the options

Question 19

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.

Accepted Answer

Both the CAPM and the APT are market equ

Question 20

___________ a relationship between expected return and risk.

Accepted Answer

A) APT stipulates 
B) CAPM stipulates 
C) Both CAPM and APT stipulate 
D) Neither CAPM nor APT stipulate 
E) No pricing model has been found. 
A) APT stipulates 
B) CAPM stipulates 
C) Both CAPM and APT stipulate 
D) Neither CAPM nor APT stipulate 
E) No pricing model has been found.

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

In terms of the risk/return relationship in the APT,

Consider the multifactor APT.The risk premiums on the factor 1 and factor 2 portfolios are 5% and 3%, respectively.The risk-free rate of return is 10%.Stock A has an expected return of 19% and a beta on factor 1 of 0.8.Stock A has a beta on factor 2 of

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

The APT was developed in 1976 by

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

Consider the one-factor APT.The standard deviation of returns on a well-diversified portfolio is 18%.The standard deviation on the factor portfolio is 16%.The beta of the well-diversified portfolio is approximately

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

A zero-investment portfolio with a positive expected return arises when

Black argues that past risk premiums on firm-characteristic variables, such as those described by Fama and French, are problematic because

The feature of the APT that offers the greatest potential advantage over the CAPM is the

The APT requires a benchmark portfolio

Consider the single factor APT.Portfolios A and B have expected returns of 14% and 18%, respectively.The risk-free rate of return is 7%.Portfolio A has a beta of 0.7.If arbitrage opportunities are ruled out, portfolio B must have a beta of

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.

___________ a relationship between expected return and risk.

The Investment Environment

Asset Classes and Financial Instruments

How Securities Are Traded

Mutual Funds and Other Investment Companies

Risk, Return, and the Historical Record

Capital Allocation to Risky Assets

Optimal Risky Portfolios

Index Models

The Capital Asset Pricing Model

The Efficient Market Hypothesis

Behavioral Finance and Technical Analysis

Empirical Evidence on Security Returns

Bond Prices and Yields

The Term Structure of Interest Rates

Managing Bond Portfolios

Macroeconomic and Industry Analysis

Equity Valuation Models

Financial Statement Analysis

Options Markets: Introduction

Option Valuation

Futures Markets

Futures, Swaps, and Risk Management

Portfolio Performance Evaluation

International Diversification

Hedge Funds

The Theory of Active Portfolio Management

Investment Policy and the Framework of the Cfa Institute

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