Question 1

A criticism of the CAPM is that it:

Accepted Answer

A) ignores the rate of return on the market portfolio. 
B) ignores the risk-free rate. 
C) requires a single measure of systematic risk. 
D) utilizes too many factors. 
E) contradicts the single-factor APT model. 
A) ignores the rate of return on the market portfolio. 
B) ignores the risk-free rate. 
C) requires a single measure of systematic risk. 
D) utilizes too many factors. 
E) contradicts the single-factor APT model. C

Question 2

Alpha stock has an expected return of 8.2 percent and betas of: βGNP = 1.23; βI = .97; and βEx = 1.08.This expectation is based on a three-factor model with expected values of: GNP growth of −1 percent; inflation of 2.4 percent; and export growth of 3.5 percent.However,actual growth in these factors turns out to be .55 percent,1.8 percent,and 2.6 percent,respectively.Assuming there was no unexpected news related specifically to the stock,what was the stock's total rate of return?

Accepted Answer

A) 8.04 percent 
B) 8.55 percent 
C) 8.47 percent 
D) 7.85 percent 
E) 8.85 percent 
A) 8.04 percent 
B) 8.55 percent 
C) 8.47 percent 
D) 7.85 percent 
E) 8.85 percent B

Question 3

In a multifactor model,explain what a factor represents and the role that beta plays in relation to factors.How do factors and betas affect the actual return?

Accepted Answer

A factor is a variable that helps identify the difference between an actual return and an estimated return.Each factor measures the surprise,or unexpected change,in a specific systematic risk.A factor's beta measures a security's or portfolio's response to a change in that factor.The actual return is equal to the estimated return plus the sum of the individual betas times their respective factors,assuming there is no unsystematic risk.

Question 4

Which one of the following statements is true?

Accepted Answer

A) Both APT and CAPM argue that expected excess return must be proportional to the beta(s). 
B) APT and CAPM are the only quantitative approaches to measure expected returns in risky assets. 
C) The factors to be used in the APT are easier to identify than the factor used in the CAPM. 
D) CAPM provides the means for a more-detailed estimate of a security's expected return than does APT. 
E) CAPM assigns a beta of 1 to the market while APT assigns the market a beta of zero. 
A) Both APT and CAPM argue that expected excess return must be proportional to the beta(s). 
B) APT and CAPM are the only quantitative approaches to measure expected returns in risky assets. 
C) The factors to be used in the APT are easier to identify than the factor used in the CAPM. 
D) CAPM provides the means for a more-detailed estimate of a security's expected return than does APT. 
E) CAPM assigns a beta of 1 to the market while APT assigns the market a beta of zero.

Question 5

If the expected rate of GNP growth was 3 percent and the actual rate was .2 percent higher than the expectation,the total return on a stock would change by ________ based on a multifactor model.

Accepted Answer

A) 3.2βGNP 
B) .2βGNP 
C) −.2βGNP 
D) −3.2βGNP 
E) 3βGNP 
A) 3.2βGNP 
B) .2βGNP 
C) −.2βGNP 
D) −3.2βGNP 
E) 3βGNP

Question 6

If an investor plans to add a stock to a well-diversified portfolio,the investor should first consider the ________ risks of that additional stock.

Accepted Answer

A) expected total 
B) historical total 
C) systematic 
D) idiosyncratic 
E) firm-specific 
A) expected total 
B) historical total 
C) systematic 
D) idiosyncratic 
E) firm-specific

Question 7

Suppose a sizeable,fully diversified portfolio has an F1 beta of .9,an F2 beta of 1.4,and an expected return of 11.6 percent.If F1 turns out to be 1.1 percent and F2 is −.8 percent,what will be the actual rate of return based on a two-factor arbitrage pricing model?

Accepted Answer

A) 12.05 percent 
B) 11.47 percent 
C) 11.72 percent 
D) 12.32 percent 
E) 12.58 percent 
A) 12.05 percent 
B) 11.47 percent 
C) 11.72 percent 
D) 12.32 percent 
E) 12.58 percent

Question 8

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

Accepted Answer

CAPM is built on the efficient set and t

Question 9

If you were to consider the CAPM as a one-factor model,then the factor would be the:

Accepted Answer

A) rate of inflation. 
B) market risk premium. 
C) GNP. 
D) risk-free rate. 
E) individual beta of each security or portfolio. 
A) rate of inflation. 
B) market risk premium. 
C) GNP. 
D) risk-free rate. 
E) individual beta of each security or portfolio.

Question 10

The general purpose of identifying multiple factors in the APT model is to:

Accepted Answer

A) identify the top three factors that have the largest impact on the market rate of return. 
B) identify and eliminate all systematic risks from a portfolio. 
C) identify the quantity of each factor that is needed to reduce a portfolio's risk,as measured by beta,to a level equal to that of the overall market. 
D) reduce the unsystematic risk to a level where the unsystematic risk of one security is unrelated to the unsystematic risk of any other security. 
E) reduce the slope of the security market line,thereby reducing portfolio risk. 
A) identify the top three factors that have the largest impact on the market rate of return. 
B) identify and eliminate all systematic risks from a portfolio. 
C) identify the quantity of each factor that is needed to reduce a portfolio's risk,as measured by beta,to a level equal to that of the overall market. 
D) reduce the unsystematic risk to a level where the unsystematic risk of one security is unrelated to the unsystematic risk of any other security. 
E) reduce the slope of the security market line,thereby reducing portfolio risk.

Question 11

Verbally describe a graph that illustrates the one-factor model.

Accepted Answer

The one-factor model can be graphed with

Question 12

Assume the single-factor model is applied to a security that has a negative factor beta.The security will:

Accepted Answer

A) always have a positive rate of return. 
B) have an expected return greater than the risk-free rate. 
C) have an actual return that equals the risk-free rate. 
D) have an expected return equal to the market rate of return. 
E) have an actual rate of return that can be positive,negative,or zero. 
A) always have a positive rate of return. 
B) have an expected return greater than the risk-free rate. 
C) have an actual return that equals the risk-free rate. 
D) have an expected return equal to the market rate of return. 
E) have an actual rate of return that can be positive,negative,or zero.

Question 13

The slope of the security market line represents the:

Accepted Answer

A) risk-premium for an individual security. 
B) risk-free rate of return. 
C) market rate of return. 
D) total return per unit of beta. 
E) market risk premium. 
A) risk-premium for an individual security. 
B) risk-free rate of return. 
C) market rate of return. 
D) total return per unit of beta. 
E) market risk premium.

Question 14

Based on a multifactor model,systematic risk arises from:

Accepted Answer

A) a common factor,F. 
B) negative betas. 
C) the lack of market liquidity. 
D) the variable,ε. 
E) a positive covariance between securities. 
A) a common factor,F. 
B) negative betas. 
C) the lack of market liquidity. 
D) the variable,ε. 
E) a positive covariance between securities.

Question 15

Assume a one-factor model where the factor is associated with the overall market.Suppose JSC's common stock has a factor beta of .8,the risk-free rate is 3.2 percent,and the expected market rate of return is 11.2 percent.What is the expected return for JSC stock?

Accepted Answer

A) 10.25 percent 
B) 6.40 percent 
C) 7.20 percent 
D) 9.60 percent 
E) 12.16 percent 
A) 10.25 percent 
B) 6.40 percent 
C) 7.20 percent 
D) 9.60 percent 
E) 12.16 percent

Question 16

The systematic response coefficient for productivity,βp,would produce an unexpected change in any security return of (βP × ________)if the expected rate of productivity was 1.5 percent and the actual rate was 2.25 percent.

Accepted Answer

A) .75 percent 
B) −.75 percent 
C) 2.25 percent 
D) − 2.25 percent 
E) 1.5 percent 
A) .75 percent 
B) −.75 percent 
C) 2.25 percent 
D) − 2.25 percent 
E) 1.5 percent

Question 17

If a security has a GNP beta of 1.5,then the security's total rate of return will:

Accepted Answer

A) increase by 1.5 percent for every 1 percent decrease in GNP. 
B) increase by 1.5 percent every time the GNP increases by 1.5 percent. 
C) change by an amount equal to 1.5 times the percentage amount of any unexpected change in GNP. 
D) change by an amount equal to the unexpected percentage change in GNP divided by a factor of 1.5. 
E) increase by 1.5 percent whenever the GNP increases by 1.5 percent. 
A) increase by 1.5 percent for every 1 percent decrease in GNP. 
B) increase by 1.5 percent every time the GNP increases by 1.5 percent. 
C) change by an amount equal to 1.5 times the percentage amount of any unexpected change in GNP. 
D) change by an amount equal to the unexpected percentage change in GNP divided by a factor of 1.5. 
E) increase by 1.5 percent whenever the GNP increases by 1.5 percent.

Question 18

A beta coefficient reflects the response of a security's return to:

Accepted Answer

A) the risk-free rate. 
B) an unsystematic risk. 
C) a systematic risk. 
D) the market rate of return. 
E) idiosyncratic risk. 
A) the risk-free rate. 
B) an unsystematic risk. 
C) a systematic risk. 
D) the market rate of return. 
E) idiosyncratic risk.

Question 19

A security held in a large,well-diversified portfolio that has a beta of zero in a one-factor model will have an actual return:

Accepted Answer

A) of zero. 
B) closely equal to the market risk premium. 
C) closely equal to the expected return. 
D) that is positive and less than the risk-free rate. 
E) that is less than the risk-free rate and can be negative. 
A) of zero. 
B) closely equal to the market risk premium. 
C) closely equal to the expected return. 
D) that is positive and less than the risk-free rate. 
E) that is less than the risk-free rate and can be negative.

Question 20

In a portfolio of risky assets,the portfolio's response to any factor,Fi,can be determined by:

Accepted Answer

A) multiplying the portfolio weighted average βi by the factor Fi. 
B) computing the portfolio weighted average Fi. 
C) multiplying the CAPM beta times the factor. 
D) summing the weighted random errors. 
E) dividing the percentage change in the factor,Fi,by the total number of factors affecting the portfolio. 
A) multiplying the portfolio weighted average βi by the factor Fi. 
B) computing the portfolio weighted average Fi. 
C) multiplying the CAPM beta times the factor. 
D) summing the weighted random errors. 
E) dividing the percentage change in the factor,Fi,by the total number of factors affecting the portfolio.

Exam 12: An Alternative View of Risk and Return: the Arbitrage Pricing Theory

A criticism of the CAPM is that it:

In a multifactor model,explain what a factor represents and the role that beta plays in relation to factors.How do factors and betas affect the actual return?

Which one of the following statements is true?

If the expected rate of GNP growth was 3 percent and the actual rate was .2 percent higher than the expectation,the total return on a stock would change by ________ based on a multifactor model.

If an investor plans to add a stock to a well-diversified portfolio,the investor should first consider the ________ risks of that additional stock.

Suppose a sizeable,fully diversified portfolio has an F1 beta of .9,an F2 beta of 1.4,and an expected return of 11.6 percent.If F1 turns out to be 1.1 percent and F2 is −.8 percent,what will be the actual rate of return based on a two-factor arbitrage pricing model?

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

If you were to consider the CAPM as a one-factor model,then the factor would be the:

The general purpose of identifying multiple factors in the APT model is to:

Verbally describe a graph that illustrates the one-factor model.

Assume the single-factor model is applied to a security that has a negative factor beta.The security will:

The slope of the security market line represents the:

Based on a multifactor model,systematic risk arises from:

Assume a one-factor model where the factor is associated with the overall market.Suppose JSC's common stock has a factor beta of .8,the risk-free rate is 3.2 percent,and the expected market rate of return is 11.2 percent.What is the expected return for JSC stock?

The systematic response coefficient for productivity,βp,would produce an unexpected change in any security return of (βP × ________)if the expected rate of productivity was 1.5 percent and the actual rate was 2.25 percent.

If a security has a GNP beta of 1.5,then the security's total rate of return will:

A beta coefficient reflects the response of a security's return to:

A security held in a large,well-diversified portfolio that has a beta of zero in a one-factor model will have an actual return:

In a portfolio of risky assets,the portfolio's response to any factor,Fi,can be determined by:

Introduction to Corporate Finance

Financial Statements and Cash Flow

Financial Statements and Cash Flow

Discounted Cash Flow Valuation

Net Present Value and Other Investment Rules

Making Capital Investment Decisions

Risk Analysis, real Options, and Capital Budgeting

Interest Rates and Bond Valuation

Stock Valuation

Lessons From Market History

Return, risk, and the Capital Asset Pricing Model Capm

Risk, cost of Capital, and Valuation

Efficient Capital Markets and Behavioral Challenges

Long-Term Financing

Capital Structure: Basic Concepts

Capital Structure: Limits to the Use of Debt

Valuation and Capital Budgeting for the Levered Firm

Dividends and Other Payouts

Raising Capital

Leasing

Options and Corporate Finance

Options and Corporate Finance: Extensions and Applications

Warrants and Convertibles

Derivatives and Hedging Risk

Short-Term Finance and Planning

Cash Management

Credit and Inventory Management

Mergers,acquisitions,and Divestitures

Financial Distress

International Corporate Finance

Filters

Suppose a sizeable,fully diversified portfolio has an F₁ beta of .9,an F₂ beta of 1.4,and an expected return of 11.6 percent.If F₁ turns out to be 1.1 percent and F₂ is −.8 percent,what will be the actual rate of return based on a two-factor arbitrage pricing model?

The systematic response coefficient for productivity,β_p,would produce an unexpected change in any security return of (β_P × ________)if the expected rate of productivity was 1.5 percent and the actual rate was 2.25 percent.

In a portfolio of risky assets,the portfolio's response to any factor,F_i,can be determined by: