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

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 turns out to be 1%,-2%,and 2%.The factor betas are given by β_EX = 1.8,β_I = 0.7,and β_IP = 1.0. Calculate the stock's total return if the company announces that they had an industrial accident and the operating facilities will close down for some time thus resulting in a loss by the company of 7% in return.Assume expected return on the stock is 6%.

Which of the following statements is/are true?

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

A growth stock portfolio and a value portfolio might be characterized

Assume that the single factor APT model applies and a portfolio exists such that 2/3 of the funds are invested in Security Q and the rest in the risk-free asset.Security Q has a beta of 1.5.The portfolio has a beta of:

If company A makes a new product discovery and their stock rises 5% this will have:

Three factors likely to occur in the APT model are:

A criticism of the CAPM is that it:

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

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 turns out to be 1%,-2%,and 2%.The factor betas are given by βEX = 1.8,βI = 0.7,and βIP = 1.0. What would the stock's total return be if the actual growth in each of the factors was equal to growth expected? Assume no unexpected news on the patent.Assume expected return on the stock is 6%.

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

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

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

The single factor APT model that resembles the market model uses _____________ as the single factor.

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 stock is:

Style portfolios are characterized by:

The acronym APT stands for:

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 turns out to be 1%,-2%,and 2%.The factor betas are given by β_EX = 1.8,β_I = 0.7,and β_IP = 1.0. If the expected return on the stock is 6%,and no unexpected news concerning the stock surfaces,calculate the stock's total return.

The acronym CAPM stands for:

Suppose the MiniCD Corporation's common stock has a return of 12%.Assume the risk-free rate is 4%,the expected market return is 9%,and no unsystematic influence affected Mini's return.The beta for MiniCD is: