Question 1

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

Accepted Answer

A)  market risk and systematic risk. 
B)  systematic risk and idiosyncratic risk. 
C)  idiosyncratic risk and unsystematic risk. 
D)  expected return and market risk. 
E)  expected return and idiosyncratic risk. 
A)  market risk and systematic risk. 
B)  systematic risk and idiosyncratic risk. 
C)  idiosyncratic risk and unsystematic risk. 
D)  expected return and market risk. 
E)  expected return and idiosyncratic risk.

Question 2

Systematic risk is defined as:

Accepted Answer

A)  a risk that specifically affects an asset or small group of assets. 
B)  any risk that affects a large number of assets. 
C)  any risk that has a huge impact on the return of a security. 
D)  the random component of return. 
A)  a risk that specifically affects an asset or small group of assets. 
B)  any risk that affects a large number of assets. 
C)  any risk that has a huge impact on the return of a security. 
D)  the random component of return.

Question 3

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 β what do these represent and how do they relate to the actual return?

Accepted Answer

Factor variable that explains some of th

Question 4

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

Accepted Answer

A)  average return, expected return, and unexpected return. 
B)  required return, expected return, and unbiased return. 
C)  actual return, expected return, and unexpected return. 
D)  required return, expected return, and unbiased risk. 
E)  risk, expected return, and unsystematic risk. 
A)  average return, expected return, and unexpected return. 
B)  required return, expected return, and unbiased return. 
C)  actual return, expected return, and unexpected return. 
D)  required return, expected return, and unbiased risk. 
E)  risk, expected return, and unsystematic risk.

Question 5

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

Accepted Answer

A)  very similarly to the CAPM via the beta of the security. 
B)  in terms of individual intersecurity correlation versus the beta of the CAPM. 
C)  via the industry wide or marketwide factors creating correlation between securities versus the CAPM beta. 
D)  the standardized deviation of the covariance. 
A)  very similarly to the CAPM via the beta of the security. 
B)  in terms of individual intersecurity correlation versus the beta of the CAPM. 
C)  via the industry wide or marketwide factors creating correlation between securities versus the CAPM beta. 
D)  the standardized deviation of the covariance.

Question 6

Financial models used to describe returns are based either on a theoretical construct or parametric methods.Parametric models rely on:

Accepted Answer

A)  security betas explaining systematic factor relationships. 
B)  finding regularities and relations in past market data. 
C)  there being no true explanations of pricing relationships. 
D)  always being able to find the exception to the rule. 
A)  security betas explaining systematic factor relationships. 
B)  finding regularities and relations in past market data. 
C)  there being no true explanations of pricing relationships. 
D)  always being able to find the exception to the rule.

Question 7

The betas along with the factors in the APT adjust the expected return for:

Accepted Answer

A)  calculation errors. 
B)  unsystematic risks. 
C)  spurious correlations of factors. 
D)  differences between actual and expected levels of factors. 
A)  calculation errors. 
B)  unsystematic risks. 
C)  spurious correlations of factors. 
D)  differences between actual and expected levels of factors.

Question 8

To estimate the required return for a security using APT or CAPM,it is necessary to have:

Accepted Answer

A)  last period's return, beta, and the standard deviation. 
B)  last period's return, beta, and the risk-free rate. 
C)  beta, the market risk premium, and the risk-free rate. 
D)  beta, last period's return, and the standard deviation. 
E)  beta, last period's return, and the market risk premium. 
A)  last period's return, beta, and the standard deviation. 
B)  last period's return, beta, and the risk-free rate. 
C)  beta, the market risk premium, and the risk-free rate. 
D)  beta, last period's return, and the standard deviation. 
E)  beta, last period's return, and the market risk premium.

Question 9

Which of the following statements is true?

Accepted Answer

A)  A well-diversified portfolio has negligible systematic risk. 
B)  A well-diversified portfolio has negligible unsystematic risk. 
C)  An individual security has negligible systematic risk. 
D)  An individual security has negligible unsystematic risk. 
A)  A well-diversified portfolio has negligible systematic risk. 
B)  A well-diversified portfolio has negligible unsystematic risk. 
C)  An individual security has negligible systematic risk. 
D)  An individual security has negligible unsystematic risk.

Question 10

A factor is a variable that:

Accepted Answer

A)  affects the returns of risky assets in a systematic fashion. 
B)  affects the returns of risky assets in an unsystematic fashion. 
C)  correlates with risky asset returns in a unsystematic fashion. 
D)  does not correlate with the returns of risky assets in an systematic fashion. 
A)  affects the returns of risky assets in a systematic fashion. 
B)  affects the returns of risky assets in an unsystematic fashion. 
C)  correlates with risky asset returns in a unsystematic fashion. 
D)  does not correlate with the returns of risky assets in an systematic fashion.

Question 11

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

Accepted Answer

A)  company financial leverage, beta, and the market risk premium. 
B)  company financial leverage, beta, and the risk-free rate. 
C)  beta, company financial leverage, and the industry beta. 
D)  beta, company financial leverage, and the market risk premium. 
E)  beta, the risk-free rate, and the market risk premium. 
A)  company financial leverage, beta, and the market risk premium. 
B)  company financial leverage, beta, and the risk-free rate. 
C)  beta, company financial leverage, and the industry beta. 
D)  beta, company financial leverage, and the market risk premium. 
E)  beta, the risk-free rate, and the market risk premium.

Question 12

The systematic response coefficient for productivity,βP,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%.

Accepted Answer

A)  0.75(βP)% 
B)  -0.75(βP)% 
C)  2.25(βP)% 
D)  -2.25% 
A)  0.75(βP)% 
B)  -0.75(βP)% 
C)  2.25(βP)% 
D)  -2.25%

Question 13

An investor is considering the three stocks given below:
A.
Stock B and C: Rp = .5(13.3%) + .5(9.2%) = 11.25%
Stock B and C: β p = .5(2.1) + .5(0.75) = 1.425
Stock B and T-bills: βB&TBILL = .5(2.1) + .5(0) = 1.05
Stock's B and A: βB&A = .5(2.1) + .5(-0.1) = 1.00
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

Accepted Answer

@#IMG-DLM& Calculate the expected return and beta

Question 14

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

Accepted Answer

A)  the weighted average expected return goes to zero. 
B)  the weighted average of the betas goes to zero. 
C)  the weighted average of the unsystematic risk goes to zero. 
D)  the return of the portfolio goes to zero. 
E)  the return on the portfolio equals the risk-free rate. 
A)  the weighted average expected return goes to zero. 
B)  the weighted average of the betas goes to zero. 
C)  the weighted average of the unsystematic risk goes to zero. 
D)  the return of the portfolio goes to zero. 
E)  the return on the portfolio equals the risk-free rate.

Question 15

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?

Accepted Answer

A)  The price will change a great deal; even though the impact is primarily in the future, the future value is discounted to the present. 
B)  The price will change little, since the impact is primarily in the future. 
C)  The price will change little, since the market considers this information unimportant. 
D)  The price will change little, since the market considers this information untrue. 
E)  The price will change little, since the market has already included this information in the security's price. 
A)  The price will change a great deal; even though the impact is primarily in the future, the future value is discounted to the present. 
B)  The price will change little, since the impact is primarily in the future. 
C)  The price will change little, since the market considers this information unimportant. 
D)  The price will change little, since the market considers this information untrue. 
E)  The price will change little, since the market has already included this information in the security's price.

Question 16

The term Corr(ε R,ε T)= 0 tells us that:

Accepted Answer

A)  the error terms of company R and T are 0. 
B)  the unsystematic risk of companies R and T is unrelated or uncorrelated. 
C)  the correlation between the returns of companies R and T is greater than zero. 
D)  the systematic risk companies R and T is unrelated. 
A)  the error terms of company R and T are 0. 
B)  the unsystematic risk of companies R and T is unrelated or uncorrelated. 
C)  the correlation between the returns of companies R and T is greater than zero. 
D)  the systematic risk companies R and T is unrelated.

Question 17

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

Accepted Answer

A)  9.2%. 
B)  3.2 βI%. 
C)  -3.2 βI%. 
D)  3.0%. 
E)  6.2 βI%. 
A)  9.2%. 
B)  3.2 βI%. 
C)  -3.2 βI%. 
D)  3.0%. 
E)  6.2 βI%.

Question 18

An advantage of the APT over CAPM is:

Accepted Answer

A)  APT can handle multiple factors. 
B)  if the factors can be properly identified, the APT may have more explanation/predictive power for returns. 
C)  the APT forces unsystematic risk to be negative to offset systematic risk; thus making the total portfolio risk free, allowing for an arbitrage opportunity for the astute investor. 
D)  APT can handle multiple factors; and if the factors can be properly identified, the APT may have more explanation/predictive power for returns. 
E)  All of these. 
A)  APT can handle multiple factors. 
B)  if the factors can be properly identified, the APT may have more explanation/predictive power for returns. 
C)  the APT forces unsystematic risk to be negative to offset systematic risk; thus making the total portfolio risk free, allowing for an arbitrage opportunity for the astute investor. 
D)  APT can handle multiple factors; and if the factors can be properly identified, the APT may have more explanation/predictive power for returns. 
E)  All of these.

Question 19

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

Accepted Answer

A)  the expected part of the announcement. 
B)  market inefficiency. 
C)  the innovation or unexpected part of the announcement. 
D)  the systematic risk. 
A)  the expected part of the announcement. 
B)  market inefficiency. 
C)  the innovation or unexpected part of the announcement. 
D)  the systematic risk.

Question 20

In normal market conditions or when the market is rising if a security has a negative beta:

Accepted Answer

A)  the security always has a positive return. 
B)  the security has an expected return above the risk-free return. 
C)  the security has an expected return less than the risk-free rate. 
D)  the security has an expected return equal to the market portfolio. 
A)  the security always has a positive return. 
B)  the security has an expected return above the risk-free return. 
C)  the security has an expected return less than the risk-free rate. 
D)  the security has an expected return equal to the market portfolio.

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

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

Systematic risk is defined as:

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 β what do these represent and how do they relate to the actual return?

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

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

Financial models used to describe returns are based either on a theoretical construct or parametric methods.Parametric models rely on:

The betas along with the factors in the APT adjust the expected return for:

To estimate the required return for a security using APT or CAPM,it is necessary to have:

Which of the following statements is true?

A factor is a variable that:

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

The systematic response coefficient for productivity,βP,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,:

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?

The term Corr(ε R,ε T)= 0 tells us that:

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

An advantage of the APT over CAPM is:

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

In normal market conditions or when the market is rising if a security has a negative beta:

Introduction to Corporate Finance

Accounting Statements and Cash Flow

Financial Planning and Growth

Financial Markets and Net Present Value: First Principles of Finance

The Time Value of Money

How to Value Bonds and Stocks

Net Present Value and Other Investment Rules

Net Present Value and Capital Budgeting

Risk Analysis,real Options,and Capital Budgeting

Risk and Return: Lessons From Market History

Risk and Return: the Capital Asset Pricing Model

Risk,return,and Capital Budgeting

Corporate Financing Decisions and Efficient Capital Markets

Long-Term Financing: an Introduction

Capital Structure: Basic Concepts

Capital Structure: Limits to the Use of Debt

Valuation and Capital Budgeting for the Levered Firm

Dividends and Other Payouts

Issuing Equity Securities to the Public

Long-Term Debt

Leasing

Options and Corporate Finance: Basic Concepts

Options and Corporate Finance: Extensions and Applications

Warrants and Convertibles

Derivatives and Hedging Risk

Short-Term Finance and Planning

Cash Management

Credit Management

Mergers and Acquisitions

Financial Distress

International Corporate Finance

Filters

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%.

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

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: