Question 1

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

Question 2

Consider a single factor APT. Portfolio A has a beta of 2.0 and an expected return of 22%. Portfolio B has a beta of 1.5 and an expected return of 17%. The risk-free rate of return is 4%. 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 3

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 4

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

Accepted Answer

A)  arbitrage. 
B)  capital-asset pricing. 
C)  factoring. 
D)  fundamental analysis. 
E)  None of the options are correct. 
A)  arbitrage. 
B)  capital-asset pricing. 
C)  factoring. 
D)  fundamental analysis. 
E)  None of the options are correct.

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

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 7

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 8

Consider the multifactor APT. There are two independent economic factors, F1 and F2. The risk-free rate of return is 6%. The following information is available about two well-diversified portfolios: $$\begin{array} { c c c c } 
\text { Portfolio } & \beta \text { on } \mathrm { F } _ { 1 } & \beta \text { on } \mathrm { F } _ { 2 } & \begin{array} { c } 
\text { Expected } \
\text { Return }
\end{array} \
\text { A } & 1.0 & 2.0 & 19 \% \
\text { B } & 2.0 & 0.0 & 12 \% \
\hline
\end{array}$$ Assuming no arbitrage opportunities exist, the risk premium on the factor F2 portfolio should be

Accepted Answer

A)  3%. 
B)  4%. 
C)  5%. 
D)  6%. 
A)  3%. 
B)  4%. 
C)  5%. 
D)  6%.

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 18% and 250 securities?

Accepted Answer

A)  1.14% 
B)  625% 
C)  0.5% 
D)  3.54% 
E)  3.16% 
A)  1.14% 
B)  625% 
C)  0.5% 
D)  3.54% 
E)  3.16%

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

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 exist?

Accepted Answer

A)  2% 
B)  3% 
C)  4% 
D)  7.75% 
A)  2% 
B)  3% 
C)  4% 
D)  7.75%

Question 12

Which of the following factors were used by Fama and French in their multifactor 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 factors were included in their model. 
E)  None of the 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 factors were included in their model. 
E)  None of the factors were included in their model.

Question 13

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%. 
A)  23.1%. 
B)  6.0%. 
C)  7.3%. 
D)  14.1%.

Question 14

Which of the following is true 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)  The SML is not relevant for the APT. 
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)  The SML is not relevant for the APT.

Question 15

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 
A)  A; A 
B)  A; B 
C)  B; A 
D)  B; B

Question 16

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

Question 17

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. 
A)  0.80. 
B)  1.13. 
C)  1.25. 
D)  1.57.

Question 18

If you invested in an equally-weighted portfolio of stocks B and C, your portfolio return would be _____________ if economic growth was weak. 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)  -2.5% 
B)  0.5% 
C)  3.0% 
D)  11.0% 
A)  -2.5% 
B)  0.5% 
C)  3.0% 
D)  11.0%

Question 19

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 20

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%

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

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

The APT was developed in 1976 by

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

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?

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

Which of the following factors were used by Fama and French in their multifactor model?

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

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

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

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

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

Filters

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

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

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

The APT was developed in 1976 by

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

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?

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

Which of the following factors were used by Fama and French in their multifactor model?

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

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

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

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

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

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?