Question 1

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

Accepted Answer

The law of one price is violated when an

Question 2

In a multi-factor APT model,the coefficients on the macro factors are often called ______.

Accepted Answer

A) systemic risk 
B) firm-specific risk 
C) idiosyncratic risk 
D) factor loadings 
E) none of the above 
A) systemic risk 
B) firm-specific risk 
C) idiosyncratic risk 
D) factor loadings 
E) none of the above

Question 3

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 ____________.

Accepted Answer

A) 4.0% 
B) 9.0% 
C) 14.0% 
D) 16.5% 
E) none of the above 
A) 4.0% 
B) 9.0% 
C) 14.0% 
D) 16.5% 
E) none of the above

Question 4

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

Accepted Answer

A) Change in industrial waste 
B) Change in expected inflation 
C) Change in unanticipated inflation 
D) B and C 
E) All of the above factors were included in their model. 
A) Change in industrial waste 
B) Change in expected inflation 
C) Change in unanticipated inflation 
D) B and C 
E) All of the above factors were included in their model.

Question 5

The APT differs from the CAPM because the APT _________.

Accepted Answer

A) places more emphasis on market risk 
B) minimizes the importance of diversification 
C) recognizes multiple unsystematic risk factors 
D) recognizes multiple systematic risk factors 
E) none of the above 
A) places more emphasis on market risk 
B) minimizes the importance of diversification 
C) recognizes multiple unsystematic risk factors 
D) recognizes multiple systematic risk factors 
E) none of the above

Question 6

To take advantage of an arbitrage opportunity,an investor would
I.construct a zero investment portfolio that will yield a sure profit.
II.construct a zero beta investment portfolio that will yield a sure profit.
III.make simultaneous trades in two markets without any net investment.
IV.short sell the asset in the low-priced market and buy it in the high-priced market.

Accepted Answer

A) I and IV 
B) I and III 
C) II and III 
D) I, III, and IV 
E) II,III,and IV 
A) I and IV 
B) I and III 
C) II and III 
D) I, III, and IV 
E) II,III,and IV

Question 7

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) A and B. 
E) A and C. 
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) A and B. 
E) A and C.

Question 8

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 9

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 20% and 20 securities?

Accepted Answer

A) 12.5% 
B) 625% 
C) 4.47% 
D) 3.54% 
E) 14.59% 
A) 12.5% 
B) 625% 
C) 4.47% 
D) 3.54% 
E) 14.59%

Question 10

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 
E) none of the above 
A) 1.33 
B) 1.50 
C) 1.67 
D) 2.00 
E) none of the above

Question 11

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?

Accepted Answer

A) 2% 
B) 3% 
C) 4% 
D) 7.75% 
E) none of the above 
A) 2% 
B) 3% 
C) 4% 
D) 7.75% 
E) none of the above

Question 12

Consider the single factor APT.Portfolio A has a beta of 0.5 and an expected return of 12%.Portfolio B has a beta of 0.4 and an expected return of 13%.The risk-free rate of return is 5%.If you wanted to take advantage of an arbitrage opportunity,you should take a short position in portfolio _________ and a long position in portfolio _________.

Accepted Answer

A) A, A 
B) A, B 
C) B, A 
D) B, B 
E) none of the above 
A) A, A 
B) A, B 
C) B, A 
D) B, B 
E) none of the above

Question 13

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 exit?

Accepted Answer

A) 9.26% 
B) 3% 
C) 4% 
D) 7.75% 
E) none of the above 
A) 9.26% 
B) 3% 
C) 4% 
D) 7.75% 
E) none of the above

Question 14

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

Accepted Answer

A) expanding beyond one factor to represent sources of systematic risk. 
B) using variables that are easier to forecast ex ante. 
C) calculating beta coefficients by an alternative method. 
D) using only stocks with relatively stable returns. 
E) ignoring firm-specific risk. 
A) expanding beyond one factor to represent sources of systematic risk. 
B) using variables that are easier to forecast ex ante. 
C) calculating beta coefficients by an alternative method. 
D) using only stocks with relatively stable returns. 
E) ignoring firm-specific risk.

Question 15

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 __________.

Accepted Answer

A) 0.67 
B) 1.00 
C) 1.30 
D) 1.69 
E) none of the above 
A) 0.67 
B) 1.00 
C) 1.30 
D) 1.69 
E) none of the above

Question 16

A well-diversified portfolio is defined as

Accepted Answer

A) one that is diversified over a large enough number of securities that the nonsystematic variance is essentially zero. 
B) one that contains securities from at least three different industry sectors. 
C) a portfolio whose factor beta equals 1.0. 
D) a portfolio that is equally weighted. 
E) all of the above. 
A) one that is diversified over a large enough number of securities that the nonsystematic variance is essentially zero. 
B) one that contains securities from at least three different industry sectors. 
C) a portfolio whose factor beta equals 1.0. 
D) a portfolio that is equally weighted. 
E) all of the above.

Question 17

Multifactor models seek to improve the performance of the single-index model by

Accepted Answer

A) modeling the systematic component of firm returns in greater detail. 
B) incorporating firm-specific components into the pricing model. 
C) allowing for multiple economic factors to have differential effects. 
D) all of the above are true. 
E) none of the above are true. 
A) modeling the systematic component of firm returns in greater detail. 
B) incorporating firm-specific components into the pricing model. 
C) allowing for multiple economic factors to have differential effects. 
D) all of the above are true. 
E) none of the above are true.

Question 18

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 __________.

Accepted Answer

A) 23.1% 
B) 6.0% 
C) 7.3% 
D) 14.1% 
E) none of the above 
A) 23.1% 
B) 6.0% 
C) 7.3% 
D) 14.1% 
E) none of the above

Question 19

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 above 
A) 0.45 
B) 1.00 
C) 1.10 
D) 1.22 
E) none of the above

Question 20

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 __________.

Accepted Answer

A) 0.80 
B) 1.13 
C) 1.25 
D) 1.57 
E) none of the above 
A) 0.80 
B) 1.13 
C) 1.25 
D) 1.57 
E) none of the above

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

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

In a multi-factor APT model,the coefficients on the macro factors are often called ______.

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

The APT differs from the CAPM because the APT _________.

In terms of the risk/return relationship in the APT

The APT requires a benchmark portfolio

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 20% and 20 securities?

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 ________.

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?

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

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 __________.

A well-diversified portfolio is defined as

Multifactor models seek to improve the performance of the single-index model by

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 __________.

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 __________.

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 __________.

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 20% and 20 securities?