Consider the multifactor APT. There are two independent economic factors, FS1U1B11S1U1B0and FS1U1B12S1U1B0. The risk-free rate of return is 6%. The following information is available about two well-diversified portfolios: \[\begin{array} { | l | l | l | l | } \hline \underline { \text { Portfolio } } & \underline { B \text { on } } \mathbf { E } \underline { 1 } & \underline { \beta \text { on } } \mathrm { F } _ { 2 } & \underline { \text { Expected Return } } \\ \hline \mathrm { A } & 1.0 & 2.0 & 19 \% \\ \hline \mathrm { B } & 2.0 & 0.0 & 12 \% \\ \hline \end{array}\] -Assuming no arbitrage opportunities exist,the risk premium on the factor F1portfolio should be __________.

A) 3% B) 4% C) 5% D) 6% E) none of the above A) 3% B) 4% C) 5% D) 6% E) none of the above

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

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 __________.

Free

(Multiple Choice)

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Question 1

Correct Answer:

Verified

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.

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(Essay)

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Question 2

Correct Answer:

Verified

An arbitrage opportunity exists because it is possible to form a portfolio of security A and the risk-free asset that has a beta of 0.75 and a different expected return than security 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.

Consider the multifactor APT.The risk premiums on the factor 1 and factor 2 portfolios are 6% and 4%,respectively.The risk-free rate of return is 4%.Stock A has an expected return of 16% and a beta on factor 1 of 1.3.Stock A has a beta on factor 2 of ________.

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(Multiple Choice)

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Question 3

Correct Answer:

Verified

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.

(Multiple Choice)

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Question 4

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

(Essay)

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Question 5

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%.

(Multiple Choice)

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Question 6

Which pricing model provides no guidance concerning the determination of the risk premium on factor portfolios?

(Multiple Choice)

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Question 7

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 __________.

(Multiple Choice)

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Question 8

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.

(Multiple Choice)

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Question 9

Advantage(s)of the APT is(are)

(Multiple Choice)

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Question 10

Consider the multifactor APT. There are two independent economic factors, F₁and F₂. The risk-free rate of return is 6%. The following information is available about two well-diversified portfolios: 1.0 2.0 19\% 2.0 0.0 12\% -Assuming no arbitrage opportunities exist,the risk premium on the factor F₁portfolio should be __________.

(Multiple Choice)

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Question 11

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.

(Multiple Choice)

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Question 12

If you invested in an equally weighted portfolio of stocks A and B,your portfolio return would be ___________ if economic growth were moderate.

(Multiple Choice)

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Question 13

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 __________.

(Multiple Choice)

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Question 14

___________ a relationship between expected return and risk.

(Multiple Choice)

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Question 15

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 __________.

(Multiple Choice)

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Question 16

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?

(Multiple Choice)

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Question 17

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

(Multiple Choice)

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Question 18

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

(Multiple Choice)

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Question 19

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

(Multiple Choice)

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Question 20

Showing 1 - 20 of 79

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

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 __________.

Consider the multifactor APT.The risk premiums on the factor 1 and factor 2 portfolios are 6% and 4%,respectively.The risk-free rate of return is 4%.Stock A has an expected return of 16% and a beta on factor 1 of 1.3.Stock A has a beta on factor 2 of ________.

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

Which pricing model provides no guidance concerning the determination of the risk premium on factor portfolios?

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 __________.

Advantage(s)of the APT is(are)

If you invested in an equally weighted portfolio of stocks A and B,your portfolio return would be ___________ if economic growth were moderate.

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 __________.

___________ a relationship between expected return and risk.

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 __________.

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

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

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

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

The Investment Environment

Asset Classes and Financial Instruments

How Securities are Traded

Mutual Funds and Other Investment Companies

Introduction to Risk,return,and the Historical Record

Risk Aversion and 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

Options Markets: Introduction

Option Valuation

Futures Markets

Futures, swaps, and Risk Management

Macroeconomic and Industry Analysis

Equity Valuation Models

Financial Statement Analysis

Portfolio Performance Evaluation

International Diversification

Hedge Funds

The Theory of Active Portfolio Management

Investment Policy and the Framework of the CFA Institute Appendices

Filters

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?