Question 1

If you invested in an equally weighted portfolio of stocks B and C,your portfolio return would be _____________ if economic growth was weak.

Accepted Answer

A) -2.5% 
B) 0.5% 
C) 3.0% 
D) 11.0% 
E) none of the above

Question 2

The term "arbitrage" refers to

Accepted Answer

A) buying low and selling high. 
B) short selling high and buying low. 
C) earning risk-free economic profits. 
D) negotiating for favorable brokerage fees. 
E) hedging your portfolio through the use of options.

Question 3

An arbitrage opportunity exists if an investor can construct a __________ investment portfolio that will yield a sure profit.

Accepted Answer

A) positive 
B) negative 
C) zero 
D) all of the above 
E) none of the above

Question 4

The ____________ provides an unequivocal statement on the expected return-beta relationship for all assets,whereas the _____________ implies that this relationship holds for all but perhaps a small number of securities.

Accepted Answer

A) APT, CAPM 
B) APT, OPM 
C) CAPM, APT 
D) CAPM, OPM 
E) none of the above

Question 5

The factor F in the APT model represents

Accepted Answer

A) firm-specific risk. 
B) the sensitivity of the firm to that factor. 
C) a factor that affects all security returns. 
D) the deviation from its expected value of a factor that affects all security returns. 
E) a random amount of return attributable to firm events.

Question 6

Which of the following is true about the security market line (SML)derived from the APT?

Accepted Answer

A) The SML has a downward slope. 
B) The SML for the APT shows expected return in relation to portfolio standard deviation. 
C) The SML for the APT has an intercept equal to the expected return on the market portfolio. 
D) The benchmark portfolio for the SML may be any well-diversified portfolio. 
E) The SML is not relevant for the APT.

Question 7

Consider the multifactor model APT with three factors.Portfolio A has a beta of 0.8 on factor 1,a beta of 1.1 on factor 2,and a beta of 1.25 on factor 3.The risk premiums on the factor 1,factor 2,and factor 3 are 3%,5% and 2%,respectively.The risk-free rate of return is 3%.The expected return on portfolio A is __________if no arbitrage opportunities exist.

Accepted Answer

A) 13.5% 
B) 13.4% 
C) 16.5% 
D) 23.0% 
E) none of the above

Question 8

A _________ portfolio is a well-diversified portfolio constructed to have a beta of 1 on one of the factors and a beta of 0 on any other factor.

Accepted Answer

A) factor 
B) market 
C) index 
D) A and B 
E) A,B,and C

Question 9

Consider the multifactor APT. There are two independent economic factors, FS1U1B11S1U1B0and FS1U1B12S1U1B0. The risk-free rate of return is 6%. The following information is available about two well-diversified portfolios: $$\begin{array} { | l | l | l | l | } 
\hline \underline { \text { Portfolio } } & \underline { B \text { on } } \mathbf { E } \underline { 1 } & \underline { \beta \text { on } } \mathrm { F } _ { 2 } & \underline { \text { Expected Return } } \
\hline \mathrm { A } & 1.0 & 2.0 & 19 \% \
\hline \mathrm { B } & 2.0 & 0.0 & 12 \% \
\hline
\end{array}$$
-Assuming no arbitrage opportunities exist,the risk premium on the factor F2 portfolio should be ___________.

Accepted Answer

A) 3% 
B) 4% 
C) 5% 
D) 6% 
E) none of the above

Question 10

In the context of the Arbitrage Pricing Theory,as a well-diversified portfolio becomes larger its nonsystematic risk approaches

Accepted Answer

A) one. 
B) infinity. 
C) zero. 
D) negative one. 
E) none of the above.

Question 11

Consider a single factor APT.Portfolio A has a beta of 2.0 and an expected return of 22%.Portfolio B has a beta of 1.5 and an expected return of 17%.The risk-free rate of return is 4%.If you wanted to take advantage of an arbitrage opportunity,you should take a short position in portfolio __________ and a long position in portfolio _______.

Accepted Answer

A) A, A 
B) A, B 
C) B, A 
D) B, B 
E) A,the riskless asset

Question 12

In a multi-factor APT model,the coefficients on the macro factors are often called ______.

Accepted Answer

A) systemic risk 
B) factor sensitivities 
C) idiosyncratic risk 
D) factor betas 
E) B and D

Question 13

If you invested in an equally weighted portfolio of stocks A and C,your portfolio return would be ____________ if economic growth was strong.

Accepted Answer

A) 17.0% 
B) 22.5% 
C) 30.0% 
D) 30.5% 
E) none of the above

Question 14

Consider a one-factor economy.Portfolio A has a beta of 1.0 on the factor and portfolio B has a beta of 2.0 on the factor.The expected returns on portfolios A and B are 11% and 17%,respectively.Assume that the risk-free rate is 6% and that arbitrage opportunities exist.Suppose you invested $100,000 in the risk-free asset,$100,000 in portfolio B,and sold short $200,000 of portfolio A.Your expected profit from this strategy would be ______________.

Accepted Answer

A) -$1,000 
B) $0 
C) $1,000 
D) $2,000 
E) none of the above

Question 15

Consider the multifactor APT with two factors.The risk premiums on the factor 1 and factor 2 portfolios are 5% and 6%,respectively.Stock A has a beta of 1.2 on factor 1,and a beta of 0.7 on factor 2.The expected return on stock A is 17%.If no arbitrage opportunities exist,the risk-free rate of return is ___________.

Accepted Answer

A) 6.0% 
B) 6.5% 
C) 6.8% 
D) 7.4% 
E) none of the above

Question 16

Portfolio A has expected return of 10% and standard deviation of 19%.Portfolio B has expected return of 12% and standard deviation of 17%.Rational investors will

Accepted Answer

A) Borrow at the risk free rate and buy A. 
B) Sell A short and buy B. 
C) Sell B short and buy A. 
D) Borrow at the risk free rate and buy B. 
E) Lend at the risk free rate and buy B.

Question 17

Consider a well-diversified portfolio,A,in a two-factor economy.The risk-free rate is 5%,the risk premium on the first factor portfolio is 4% and the risk premium on the second factor portfolio is 6%.If portfolio A has a beta of 0.6 on the first factor and 1.8 on the second factor,what is its expected return?

Accepted Answer

A) 7.0% 
B) 8.0% 
C) 18.2% 
D) 13.0% 
E) 13.2%

Question 18

In the APT model,what is the nonsystematic standard deviation of an equally-weighted portfolio that has an average value of •(ei)equal to 25% and 50 securities?

Accepted Answer

A) 12.5% 
B) 625% 
C) 0.5% 
D) 3.54% 
E) 14.59%

Question 19

In a multi-factor APT model,the coefficients on the macro factors are often called ______.

Accepted Answer

A) systemic risk 
B) firm-specific risk 
C) idiosyncratic risk 
D) factor betas 
E) none of the above

Question 20

If you wanted to take advantage of a risk-free arbitrage opportunity,you should take a short position in _________ and a long position in an equally weighted portfolio of _______.

Accepted Answer

A) A, B and C 
B) B, A and C 
C) C, A and B 
D) A and B, C 
E) none of the above

Exam 10: Arbitrage Pricing Theory and Multifactor Models of Risk and Return

If you invested in an equally weighted portfolio of stocks B and C,your portfolio return would be _____________ if economic growth was weak.

The term "arbitrage" refers to

An arbitrage opportunity exists if an investor can construct a __________ investment portfolio that will yield a sure profit.

The provides an unequivocal statement on the expected return-beta relationship for all assets,whereas the _ implies that this relationship holds for all but perhaps a small number of securities.

The factor F in the APT model represents

Which of the following is true about the security market line (SML) derived from the APT?

A _________ portfolio is a well-diversified portfolio constructed to have a beta of 1 on one of the factors and a beta of 0 on any other factor.

In the context of the Arbitrage Pricing Theory,as a well-diversified portfolio becomes larger its nonsystematic risk approaches

In a multi-factor APT model,the coefficients on the macro factors are often called ______.

If you invested in an equally weighted portfolio of stocks A and C,your portfolio return would be ____________ if economic growth was strong.

Portfolio A has expected return of 10% and standard deviation of 19%.Portfolio B has expected return of 12% and standard deviation of 17%.Rational investors will

In the APT model,what is the nonsystematic standard deviation of an equally-weighted portfolio that has an average value of •(e_i) equal to 25% and 50 securities?

In a multi-factor APT model,the coefficients on the macro factors are often called ______.

If you wanted to take advantage of a risk-free arbitrage opportunity,you should take a short position in ___ and a long position in an equally weighted portfolio of _.

Exam 10: Arbitrage Pricing Theory and Multifactor Models of Risk and Return

If you invested in an equally weighted portfolio of stocks B and C,your portfolio return would be _____________ if economic growth was weak.

The term "arbitrage" refers to

An arbitrage opportunity exists if an investor can construct a __________ investment portfolio that will yield a sure profit.

The ____________ provides an unequivocal statement on the expected return-beta relationship for all assets,whereas the _____________ implies that this relationship holds for all but perhaps a small number of securities.

The factor F in the APT model represents

Which of the following is true about the security market line (SML) derived from the APT?

A _________ portfolio is a well-diversified portfolio constructed to have a beta of 1 on one of the factors and a beta of 0 on any other factor.

In the context of the Arbitrage Pricing Theory,as a well-diversified portfolio becomes larger its nonsystematic risk approaches

In a multi-factor APT model,the coefficients on the macro factors are often called ______.

If you invested in an equally weighted portfolio of stocks A and C,your portfolio return would be ____________ if economic growth was strong.

Portfolio A has expected return of 10% and standard deviation of 19%.Portfolio B has expected return of 12% and standard deviation of 17%.Rational investors will

In the APT model,what is the nonsystematic standard deviation of an equally-weighted portfolio that has an average value of •(ei) equal to 25% and 50 securities?

In a multi-factor APT model,the coefficients on the macro factors are often called ______.

If you wanted to take advantage of a risk-free arbitrage opportunity,you should take a short position in _________ and a long position in an equally weighted portfolio of _______.

The provides an unequivocal statement on the expected return-beta relationship for all assets,whereas the _ implies that this relationship holds for all but perhaps a small number of securities.

In the APT model,what is the nonsystematic standard deviation of an equally-weighted portfolio that has an average value of •(e_i) equal to 25% and 50 securities?

If you wanted to take advantage of a risk-free arbitrage opportunity,you should take a short position in ___ and a long position in an equally weighted portfolio of _.