Exam 11: Factor Models and the Arbitrage Pricing Theory

You have a 3 factor model to explain returns.Explain what a factor represents in the context of the APT? Each factor is multiplied by a beta.What do these represent and how do they relate to the actual return?

Parametric or empirical models rely on:

In the equation R = + U,the three symbols stand for:

The acronym APT stands for:

A factor is a variable that:

Both the APT and the CAPM imply a positive relationship between expected return and risk.The APT views risk:

19.For a diversified portfolio including a large number of equitys,the:

Three factors likely to occur in the APT model are:

A company owning gold mines will probably have a _____ inflation beta because an ___ increase in inflation is usually associated with an increase in gold prices.

A security that has a beta of zero will have an expected return of:

The systematic response coefficient for productivity,b_P,would produce an unexpected change in any security return of __ b_P if the expected rate of productivity was 1.5% and the actual rate was 2.25%.

Suppose that we have identified three important systematic risk factors given by exports,inflation,and industrial production.In the beginning of the year,growth in these three factors is estimated at -1%,2.5%,and 3.5% respectively.However,actual growth in these factors turn out to be 1%,-2%,and 2%.The factor betas are given by b_EX = 1.8,b_I = 0.7,and b_IP = 1.0.If the expected return on the equity is 6%,and no unexpected news concerning the equity surfaces,calculate the equity's total return.

A criticism of the CAPM is that it:

Suppose that we have identified three important systematic risk factors given by exports,inflation,and industrial production.In the beginning of the year,growth in these three factors is estimated at -1%,2.5%,and 3.5% respectively.However,actual growth in these factors turn out to be 1%,-2%,and 2%.The factor betas are given by b_EX = 1.8,b_I = 0.7,and b_IP = 1.0.What would the equity's total return be if the actual growth in each of the facts was equal to growth expected? Assume no unexpected news on the patent.

Suppose that we have identified three important systematic risk factors given by exports,inflation,and industrial production.In the beginning of the year,growth in these three factors is estimated at -1%,2.5%,and 3.5% respectively.However,actual growth in these factors turn out to be 1%,-2%,and 2%.The factor betas are given by b_EX = 1.8,b_I = 0.7,and b_IP = 1.0.Calculate the equity's total return if the company announces that they had an industrial accident and the operating facilities will closed down for some time thus resulting in a loss by the company of 7% in return.

Explain the conceptual differences in the theoretical development of the CAPM and APT.

To estimate the cost of equity capital for a firm using the CAPM,it is necessary to have:

Assuming that the single factor APT model applies,the beta for the market portfolio is:

Style portfolios are characterized by:

Suppose the JumpStart Corporation's ordinary equity has a beta of 0.8.If the risk-free rate is 4% and the expected market return is 9%,the expected return for JumpStart's common is: