Question 1

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 2

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 3

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

Accepted Answer

A)  Change in industrial production 
B)  Change in expected inflation 
C)  Change in unanticipated inflation 
D)  Excess return of long-term government bonds over T-bills 
E)  All of the factors are included in the Chen, Roll, and Ross multifactor model. 
A)  Change in industrial production 
B)  Change in expected inflation 
C)  Change in unanticipated inflation 
D)  Excess return of long-term government bonds over T-bills 
E)  All of the factors are included in the Chen, Roll, and Ross multifactor model.

Question 4

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 5

The factor F in the APT model represents

Accepted Answer

A)  firm-specific risk. 
B)  the sensitivity of the firm to that factor. 
C)  a factor that affects all security returns. 
D)  the deviation from its expected value of a factor that affects all security returns. 
E)  a random amount of return attributable to firm events. 
A)  firm-specific risk. 
B)  the sensitivity of the firm to that factor. 
C)  a factor that affects all security returns. 
D)  the deviation from its expected value of a factor that affects all security returns. 
E)  a random amount of return attributable to firm events.

Question 6

In the APT model, what is the nonsystematic standard deviation of an equally-weighted portfolio that has an average value of (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 7

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 8

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

Accepted Answer

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

Question 9

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

Accepted Answer

A)  factor risk. 
B)  nonfactor risk. 
C)  standard deviation of returns. 
D)  factor risk and nonfactor risk. 
E)  None of the options are true. 
A)  factor risk. 
B)  nonfactor risk. 
C)  standard deviation of returns. 
D)  factor risk and nonfactor risk. 
E)  None of the options are true.

Question 10

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)  3.0% 
B)  14.5% 
C)  15.5% 
D)  16.0% 
A)  3.0% 
B)  14.5% 
C)  15.5% 
D)  16.0%

Question 11

___________ 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.

Question 12

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 options are correct. 
E)  None of the options are correct. 
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 options are correct. 
E)  None of the options are correct.

Question 13

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

Accepted Answer

A)  The CAPM 
B)  The multifactor APT 
C)  Both the CAPM and the multifactor APT 
D)  Neither the CAPM nor the multifactor APT 
E)  None of the options are correct. 
A)  The CAPM 
B)  The multifactor APT 
C)  Both the CAPM and the multifactor APT 
D)  Neither the CAPM nor the multifactor APT 
E)  None of the options are correct.

Question 14

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

Accepted Answer

A)  1.33. 
B)  1.05. 
C)  1.67. 
D)  2.00. 
A)  1.33. 
B)  1.05. 
C)  1.67. 
D)  2.00.

Question 15

In the context of the Arbitrage Pricing Theory, as a well-diversified portfolio becomes larger, its nonsystematic risk approaches

Accepted Answer

A)  one. 
B)  infinity. 
C)  zero. 
D)  negative one. 
A)  one. 
B)  infinity. 
C)  zero. 
D)  negative one.

Question 16

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

Accepted Answer

A)  1.58. 
B)  1.13. 
C)  1.25. 
D)  0.76. 
A)  1.58. 
B)  1.13. 
C)  1.25. 
D)  0.76.

Question 17

Advantage(s) of the APT is(are)

Accepted Answer

A)  that the model provides specific guidance concerning the determination of the risk premiums on the factor portfolios. 
B)  that the model does not require a specific benchmark market portfolio. 
C)  that risk need not be considered. 
D)  that the model provides specific guidance concerning the determination of the risk premiums on the factor portfolios, and that the model does not require a specific benchmark market portfolio. 
E)  that the model does not require a specific benchmark market portfolio, and that risk need not be considered. 
A)  that the model provides specific guidance concerning the determination of the risk premiums on the factor portfolios. 
B)  that the model does not require a specific benchmark market portfolio. 
C)  that risk need not be considered. 
D)  that the model provides specific guidance concerning the determination of the risk premiums on the factor portfolios, and that the model does not require a specific benchmark market portfolio. 
E)  that the model does not require a specific benchmark market portfolio, and that risk need not be considered.

Question 18

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

Accepted Answer

A)  systematic risk 
B)  firm-specific risk. 
C)  idiosyncratic risk. 
D)  factor loadings. 
A)  systematic risk 
B)  firm-specific risk. 
C)  idiosyncratic risk. 
D)  factor loadings.

Question 19

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?

Accepted Answer

A)  9.26% 
B)  3% 
C)  4% 
D)  7.75% 
A)  9.26% 
B)  3% 
C)  4% 
D)  7.75%

Question 20

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.

Accepted Answer

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

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

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

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

The APT requires a benchmark portfolio

The factor F in the APT model represents

In the APT model, what is the nonsystematic standard deviation of an equally-weighted portfolio that has an average value of (ei ) equal to 20% and 20 securities?

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

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

___________ a relationship between expected return and risk.

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

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

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

In the context of the Arbitrage Pricing Theory, as a well-diversified portfolio becomes larger, its nonsystematic risk approaches

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)

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

The Investment Environment

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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

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Futures, Swaps, and Risk Management

Portfolio Performance Evaluation

International Diversification

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The Theory of Active Portfolio Management

Investment Policy and the Framework of the Cfa Institute

Filters

In the APT model, what is the nonsystematic standard deviation of an equally-weighted portfolio that has an average value of (e_i ) equal to 20% and 20 securities?