$\begin{array}{|l|l|l|l|} \hline \text { Factor } & {\left[\mathrm{E}\left(\mathrm{R}_{\mathrm{M}}\right)-\mathrm{R}_{\mathrm{F}}\right)} & \mathrm{SMB} & \mathrm{HML} \\ \hline \text { Sensitivity } & \mathrm{b}_{\mathrm{i}}=1.75 & \mathrm{~s}_{\mathrm{i}}=-0.80 & \mathrm{~h}_{\mathrm{i}}=0.60 \\ \hline \text { Risk premium } & 18.5 \% & 5.25 \% & 0.50 \% \\ \hline \end{array}$ -Suppose the above asset is observed in the market trading with an expected return of 18%.What strategy would you suggest to profit from this situation,assuming the CAPM was the correct pricing model and the risk-free rate was 8%?

A) buy the asset B) short-sell the asset C) buy the risk-free asset D) sell the market portfolio A) buy the asset B) short-sell the asset C) buy the risk-free asset D) sell the market portfolio

$\begin{array}{|l|l|l|l|l|} \hline & \text { Factor 1 } & \text { Factor 2 } & \text { Factor 3 } & \text { Factor 4 } \\ \hline \text { Risk premium } & 3.8 \% & 4.4 \% & 5.7 \% & 5.9 \% \\ \hline \text { Asset sensitivity } & -1.2 & -1.6 & 1.9 & 0.6 \\ \hline \end{array}$ -Given the factors pricing assets above and a risk-free rate of return of 6%,what is the expected return of the asset using the APT?

A) $ 2.49 \% $ B) $ 2.76 \% $ C) $ 3.13 \% $ D) $ 8.77 \% $ A) $ 2.49 \% $ B) $ 2.76 \% $ C) $ 3.13 \% $ D) $ 8.77 \% $

Exam 9: Alternative Risky Asset Pricing Models

If the All-Ordinaries has a beta with respect to the world market of 1.2,and the world market return and risk-free rate are 12% and 6% respectively,then the expected return predicted by the ICAPM for Australia is:

Free

(Multiple Choice)

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Question 1

Correct Answer:

Verified

Consider the multifactor APT with two factors.Portfolio A has a beta of .5 on factor 1 and a beta of 1.25 on factor 2.The risk premiums on the factor 1 and 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.

Free

(Multiple Choice)

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Question 2

Correct Answer:

Verified

According to the Faff studies in 1992,which of the following models dominates in describing equity returns in the Australian market?

Free

(Multiple Choice)

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Question 3

Correct Answer:

Verified

Considering the CAPM in an international context leads to further complications on top of those associated with the local CAPM.These include:

(Multiple Choice)

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Question 4

The findings of Jegadeesh and Titman (1993)when looking at stocks in the USA in relation to findings about very strong prior positive or negative performance confer that a profitable momentum strategy appears viable and can be assessed by assuming a long position in the winner portfolio and a short position in the loser portfolio.

(True/False)

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Question 5

According to the CCAPM,if the expected return on the market return is 6% and the risk-free rate is 4.5%,the consumption beta of a portfolio with 6% is 3.0.

(True/False)

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Question 6

Factor - Sensitivity =1.75 =-0.80 =0.60 Risk premium 18.5\% 5.25\% 0.50\% -Suppose the above asset is observed in the market trading with an expected return of 18%.What strategy would you suggest to profit from this situation,assuming the CAPM was the correct pricing model and the risk-free rate was 8%?

(Multiple Choice)

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Question 7

Using Solnik's (1974)ICAPM,what is the expected return on an Australian security with a world market beta of 0.78 if the Australian risk-free rate is 5.37%,the world risk-free rate is 1.7% and the expected return on the world market portfolio is 13.19%?

(Multiple Choice)

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Question 8

The cross-sectional regression technique of Fama and Macbeth (1973)is used in the Asset Pricing field to estimate risk premiums.

(True/False)

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Question 9

Factor 1 Factor 2 Factor 3 Factor 4 Risk premium 3.8\% 4.4\% 5.7\% 5.9\% Asset sensitivity -1.2 -1.6 1.9 0.6 -Given the factors pricing assets above and a risk-free rate of return of 6%,what is the expected return of the asset using the APT?

(Multiple Choice)

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Question 10

Which of the following factors did Chen,Roll and Ross (1986)include in their APT model?

(Multiple Choice)

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Question 11

An arbitrage portfolio exists,including an asset A with a total market value of $60 000 and 100 other assets with a combined market value of $850 000.Assume that asset A is mispriced,with a pricing error of 17%,while the remainder of the assets are priced correctly according to the factor structure.What is the arbitrage portfolio pricing error?

(Multiple Choice)

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Question 12

In a study of the Australian equity market,Faff (1988)identifies up to three priced factors.

(True/False)

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Question 13

The possibility of arbitrage arises when there is no consensus among investors regarding the future direction of the market,and thus trades are made arbitrarily.

(True/False)

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Question 14

The international CAPM avoids the critique regarding the identification of the market portfolio,as raised by Roll (1977).

(True/False)

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Question 15

The CCAPM assumes that a functioning capital market exists that allows investors to achieve their desired level of personal consumption.

(True/False)

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Question 16

Marion and Birkan (i.e.M and B)are aspiring young investment students.During the lecture on asset pricing,both were inspired by the beauty of the models presented.M found the CAPM model overly simplistic and favoured the Fama-French model,while B disagreed,and instead believed that the CAPM,being more theoretical,was the better model.As part of a class assignment,they were each given the tabled information regarding an asset and asked to recommend a trading strategy based upon their preferred asset pricing model.If the asset is observed in the market trading with an expected return of 28%,and the risk-free rate is 8%,what are the relative trading strategy recommendations of each investor?

(Multiple Choice)

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Question 17

An asset in the Australian market has a consumption beta of 3.0.If the variance of the asset is 20% and the variance of the growth rate in consumption is 12.5%,what is the asset's covariance with the growth rate in consumption?

(Multiple Choice)

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Question 18

Which of the following is NOT a factor used by Chen,Roll and Ross (1986)in their empirical test of the APT?

(Multiple Choice)

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Question 19

The dividend discount model is often used for the purpose of identifying factors in the international CAPM.

(True/False)

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Question 20

Showing 1 - 20 of 40

If the All-Ordinaries has a beta with respect to the world market of 1.2,and the world market return and risk-free rate are 12% and 6% respectively,then the expected return predicted by the ICAPM for Australia is:

According to the Faff studies in 1992,which of the following models dominates in describing equity returns in the Australian market?

Considering the CAPM in an international context leads to further complications on top of those associated with the local CAPM.These include:

According to the CCAPM,if the expected return on the market return is 6% and the risk-free rate is 4.5%,the consumption beta of a portfolio with 6% is 3.0.

Using Solnik's (1974)ICAPM,what is the expected return on an Australian security with a world market beta of 0.78 if the Australian risk-free rate is 5.37%,the world risk-free rate is 1.7% and the expected return on the world market portfolio is 13.19%?

The cross-sectional regression technique of Fama and Macbeth (1973)is used in the Asset Pricing field to estimate risk premiums.

Factor 1 Factor 2 Factor 3 Factor 4 Risk premium 3.8\% 4.4\% 5.7\% 5.9\% Asset sensitivity -1.2 -1.6 1.9 0.6 -Given the factors pricing assets above and a risk-free rate of return of 6%,what is the expected return of the asset using the APT?

Which of the following factors did Chen,Roll and Ross (1986)include in their APT model?

In a study of the Australian equity market,Faff (1988)identifies up to three priced factors.

The possibility of arbitrage arises when there is no consensus among investors regarding the future direction of the market,and thus trades are made arbitrarily.

The international CAPM avoids the critique regarding the identification of the market portfolio,as raised by Roll (1977).

The CCAPM assumes that a functioning capital market exists that allows investors to achieve their desired level of personal consumption.

An asset in the Australian market has a consumption beta of 3.0.If the variance of the asset is 20% and the variance of the growth rate in consumption is 12.5%,what is the asset's covariance with the growth rate in consumption?

Which of the following is NOT a factor used by Chen,Roll and Ross (1986)in their empirical test of the APT?

The dividend discount model is often used for the purpose of identifying factors in the international CAPM.

The Investment Decision

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Financial Management: Derivative Instruments and Information Sources

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Risky Asset Pricing Models and the Capm

Concepts and Applications of Market Efficiency

Equity Valuation Models

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Advanced Issues in Options

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