Question 1

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

Accepted Answer

A) factor risk. 
B) non-factor risk. 
C) standard deviation of returns. 
D) both A and B are true. 
E) none of the above are true. 
A) factor risk. 
B) non-factor risk. 
C) standard deviation of returns. 
D) both A and B are true. 
E) none of the above are true.

Question 2

The following factors might affect stock returns:

Accepted Answer

A) the business cycle. 
B) interest rate fluctuations. 
C) inflation rates. 
D) all of the above. 
E) none of the above. 
A) the business cycle. 
B) interest rate fluctuations. 
C) inflation rates. 
D) all of the above. 
E) none of the above.

Question 3

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 40 securities?

Accepted Answer

A) 12.5% 
B) 625% 
C) 0.5% 
D) 3.54% 
E) 3.16% 
A) 12.5% 
B) 625% 
C) 0.5% 
D) 3.54% 
E) 3.16%

Question 4

Which of the following factors were used by Fama and French in their multi-factor model?

Accepted Answer

A) Return on the market index. 
B) Excess return of small stocks over large stocks. 
C) Excess return of high book-to-market stocks over low book-to-market stocks. 
D) All of the above factors were included in their model. 
E) None of the above factors were included in their model. 
A) Return on the market index. 
B) Excess return of small stocks over large stocks. 
C) Excess return of high book-to-market stocks over low book-to-market stocks. 
D) All of the above factors were included in their model. 
E) None of the above factors were included in their model.

Question 5

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?

Accepted Answer

A) 7.0% 
B) 8.0% 
C) 9.2% 
D) 13.0% 
E) 13.2% 
A) 7.0% 
B) 8.0% 
C) 9.2% 
D) 13.0% 
E) 13.2%

Question 6

An investor will take as large a position as possible when an equilibrium price relationship is violated.This is an example of _________.

Accepted Answer

A) a dominance argument 
B) the mean-variance efficiency frontier 
C) a risk-free arbitrage 
D) the capital asset pricing model 
E) none of the above 
A) a dominance argument 
B) the mean-variance efficiency frontier 
C) a risk-free arbitrage 
D) the capital asset pricing model 
E) none of the above

Question 7

Discuss the advantages of the multifactor APT over the single factor APT and the CAPM.What is one shortcoming of the multifactor APT and how does this shortcoming compare to CAPM implications?

Accepted Answer

The single factor APT and the CAPM assum

Question 8

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

Accepted Answer

A) The SML has a downward slope. 
B) The SML for the APT shows expected return in relation to portfolio standard deviation. 
C) The SML for the APT has an intercept equal to the expected return on the market portfolio. 
D) The benchmark portfolio for the SML may be any well-diversified portfolio. 
E) A,B,and C are false. 
A) The SML has a downward slope. 
B) The SML for the APT shows expected return in relation to portfolio standard deviation. 
C) The SML for the APT has an intercept equal to the expected return on the market portfolio. 
D) The benchmark portfolio for the SML may be any well-diversified portfolio. 
E) A,B,and C are false.

Question 9

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 10

Consider the single factor APT.Portfolio A has a beta of 0.2 and an expected return of 13%.Portfolio B has a beta of 0.4 and an expected return of 15%.The risk-free rate of return is 10%.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 11

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

Accepted Answer

A) pure arbitrage. 
B) risk arbitrage. 
C) option arbitrage. 
D) equilibrium arbitrage. 
E) none of the above. 
A) pure arbitrage. 
B) risk arbitrage. 
C) option arbitrage. 
D) equilibrium arbitrage. 
E) none of the above.

Question 12

Consider the one-factor APT.The variance of returns on the factor portfolio is 9%.The beta of a well-diversified portfolio on the factor is 1.25.The variance of returns on the well-diversified portfolio is approximately __________.

Accepted Answer

A) 3.6% 
B) 6.0% 
C) 7.3% 
D) 14.1% 
E) none of the above 
A) 3.6% 
B) 6.0% 
C) 7.3% 
D) 14.1% 
E) none of the above

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

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 
E) none of the above 
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 
E) none of the above

Question 15

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 16

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 _______.

Accepted Answer

A) A, A 
B) A, B 
C) B, A 
D) B, B 
E) A,the riskless asset 
A) A, A 
B) A, B 
C) B, A 
D) B, B 
E) A,the riskless asset

Question 17

The APT was developed in 1976 by ____________.

Accepted Answer

A) Lintner 
B) Modigliani and Miller 
C) Ross 
D) Sharpe 
E) none of the above 
A) Lintner 
B) Modigliani and Miller 
C) Ross 
D) Sharpe 
E) none of the above

Question 18

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) neither A nor B 
E) both A and B 
A) a common macroeconomic factor 
B) firm-specific factors 
C) pricing error 
D) neither A nor B 
E) both A and B

Question 19

An important difference between CAPM and APT is

Accepted Answer

A) CAPM depends on risk-return dominance; APT depends on a no arbitrage condition. 
B) CAPM assumes many small changes are required to bring the market back to equilibrium; APT assumes a few large changes are required to bring the market back to equilibrium. 
C) implications for prices derived from CAPM arguments are stronger than prices derived from APT arguments. 
D) all of the above are true. 
E) both A and B are true. 
A) CAPM depends on risk-return dominance; APT depends on a no arbitrage condition. 
B) CAPM assumes many small changes are required to bring the market back to equilibrium; APT assumes a few large changes are required to bring the market back to equilibrium. 
C) implications for prices derived from CAPM arguments are stronger than prices derived from APT arguments. 
D) all of the above are true. 
E) both A and B are true.

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

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

The following factors might affect stock returns:

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 40 securities?

Which of the following factors were used by Fama and French in their multi-factor model?

An investor will take as large a position as possible when an equilibrium price relationship is violated.This is an example of _________.

Discuss the advantages of the multifactor APT over the single factor APT and the CAPM.What is one shortcoming of the multifactor APT and how does this shortcoming compare to CAPM implications?

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

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

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

Consider the one-factor APT.The variance of returns on the factor portfolio is 9%.The beta of a well-diversified portfolio on the factor is 1.25.The variance of returns on the well-diversified portfolio is approximately __________.

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

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

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.

The APT was developed in 1976 by ____________.

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

An important difference between CAPM and APT is

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 40 securities?