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

Which of the following is true about the impact on market price of a security when a company makes an announcement and the market has discounted the news?

Shareholders discount many corporate announcements because of their prior expectations. If an announcement causes the price to change it will mostly be driven by:

The term Corr(å _R, ε _T) = 0 tells us that:

Three factors likely to occur in the APT model are:

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

For a diversified portfolio including a large number of stocks,:

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

In the One Factor (APT) Model, the characteristic line to estimate βi passes through the origin, unlike the estimate used in the CAPM because:

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

An investor is considering the three stocks given below: Calculate the expected return and beta of a portfolio equally weighted between stocks B and C. Demonstrate that holding stock A actually reduces risk by comparing the risk of a portfolio equally weighted between stock B and T-Bills with a portfolio equally weighted between stock B and A.

The unexpected return on a security, U, is made up of:

The acronym CAPM stands for:

If the expected rate of inflation was 3% and the actual rate was 6.2%; the systematic response coefficient from inflation, β_I, would result in a change in any security return of:

Suppose the JumpStart Corporation's common stock 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:

In normal market conditions if a security has a negative beta:

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

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

A criticism of the CAPM is that it:

A growth stock portfolio and a value portfolio might be characterized

In a portfolio of risk y assets the response to a factor, F_i, can easily be determined by: