Exam 7: Asset Pricing Models: Capm and Apt

Assume that as a portfolio manager the beta of your portfolio is 1.2 and that your performance is exactly on target with the SML data under condition 1. If the true SML data is given by condition 2, how much does your performance differ from the true SML? 1) $\quad \mathrm{RFR}=.09$ $\quad$$\quad$$\quad$ $\mathrm{R}_{\mathrm{m}}($ proxy $)=.12$ 2) $\quad \mathrm{R}_{\mathrm{K}}=10$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\mathrm{R}_{\mathrm{m}}($ true $)=13$

In one of their empirical tests of the APT, Roll and Ross examined the relationship between a security's returns and its own standard deviation. A finding of a statistically significant relationship would indicate that

In a multifactor model, what does confidence risk represent?

Which of the following is not an assumption of the Capital Market Theory?

Correlation of the market portfolio and the zero-beta portfolio will be linear.

Exhibit 7-4 USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) Stock Beta Current Price Expected Price Expected Dividend 0.8 \ 12.50 \ 13.10 \ 0.80 1.1 \ 8.25 \ 9.76 \ 0.20 2.1 \ 25.70 \ 30.04 \ 0.00 -Refer to Exhibit 7-4. Which of the following statements is correct?

The APT assumes that security returns are normally distributed.

If the market portfolio is mean-variance efficient it has the lowest risk for a given level of return among the attainable set of portfolios.

If the assumption that there are no transaction costs is relaxed, the SML will be a

If an incorrect proxy market portfolio such as the S&P/TSX composite index is used when developing the security market line, the slope of the line will tend to be underestimated.

The Capital Market Line (CML) can be thought of as the new Efficient Frontier.

The APT assumes that capital markets are perfectly competitive.

A study by Chen, Roll, and Ross in 1986 examined all of the following factors in applying the Arbitrage Pricing Theory (APT) except the

If an individual owns only one security, what is the most appropriate measure of risk?

Exhibit 7-8 USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) Consider the three stocks, stock X, stock Y and stock Z, that have the following factor loadings (or factor betas) Stack Factor 1 Loading Factor 2 Loading -0.55 1.2 -0.10 0.85 0.35 0.5 The zero-beta return (λ₀) = 3%, and the risk premia are λ₁ = 10%, λ₂ = 8%. Assume that all three stocks are currently priced at $50. -Refer to Exhibit 7-8. The new prices now for stocks X, Y, and Z that will not allow for arbitrage profits are

A risk-free asset is one in which the return is completely guaranteed, there is no uncertainty.

Which of the following is not a relaxation of the assumptions for the CAPM?

Calculate the expected return for F Inc. which has a beta of 1.3 when the risk free rate is 0.06 and you expect the market return to be 0.125.

Calculate the expected return for C Inc. which has a beta of 0.8 when the risk free rate is 0.04 and you expect the market return to be 0.12.

Exhibit 7-3 USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) Period Return of Radtran (Percent) Ppecific Index (Percent) True General Index (Percent) 1 10 12 15 2 12 10 13 3 -10 -8 -8 4 -4 -10 0 -Refer to Exhibit 7-3. What is the beta for Radtron using the proxy index?