Question 1

Calculate the stock's total return if the company announces that an important patent filing has been granted sooner than expected and will earn the company 5% more in return.

Accepted Answer

A) 7.95% 
B) 9.95% 
C) 11.55% 
D) 7.90% 
E) 9.35%

Question 2

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. 
E) None of the above.

Question 3

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:

Accepted Answer

A) 3.2%. 
B) 4.0%. 
C) 7.2%. 
D) 8.0%. 
E) 9.0%.

Question 4

Which of the following statements is/are true?

Accepted Answer

A) Both APT and CAPM argue that expected excess return must be proportional to the beta(s). 
B) APT and CAPM are the only approaches to measure expected returns in risky assets. 
C) Both CAPM and APT are risk-based models. 
D) Both A and B. 
E) Both A and C.

Question 5

In the one factor (APT) model, the characteristic line to estimate $\beta$i passes through the origin, unlike the estimate used in the CAPM because:

Accepted Answer

A) the relationship is between the actual return on a security and the market index. 
B) the relationship measures the change in the security return over time versus the change in the market return. 
C) the relationship measures the change in excess return on a security versus GNP. 
D) the relationship measures the change in excess return on a security versus the return on the factor about its mean of zero. 
E) Cannot be determined without actual data.

Question 6

A growth stock portfolio and a value portfolio might be characterized:

Accepted Answer

A) each by their P/E relative to the index P/E; high P/E for growth and lower for value. 
B) as earning a high rate of return for a growth security and a low rate of return for value security irrespective of risk. 
C) low unsystematic risk and high systematic risk respectively. 
D) moderate systematic risk and zero systematic risk respectively. 
E) None of the above.

Question 7

Parametric or empirical 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. 
E) None of the above

Question 8

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, if at all, since the impact is primarily in the future. 
C) The price will change little, if at all, since the market considers this information unimportant. 
D) The price will change little, if at all, since the market considers this information untrue. 
E) The price will change little, if at all, since the market has already included this information in the security's price.

Question 9

A value company is defined as one that:

Accepted Answer

A) tends to have a lower average return than a growth company. 
B) tends to have higher average return than a growth company. 
C) has a high ratio of book equity to market equity. 
D) a and b. 
E) a and c.

Question 10

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

Accepted Answer

A) no effect on Company B's, a newspaper, stock price because it is a systematic risk element. 
B) no effect on Company B's, a newspaper, stock price because it is an unsystematic risk element. 
C) a large effect on Company B's, a newspaper, stock price because it is a systematic risk element. 
D) a large effect on Company B's, a newspaper, stock price because it is an unsystematic risk element. 
E) None of the above.

Question 11

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

Accepted Answer

A) zero. 
B) one. 
C) the average of the risk free beta and the beta for the highest risk security. 
D) impossible to calculate without collecting sample data. 
E) None of the above.

Question 12

If the expected rate of inflation was 3% and the actual rate was 6.2%; the systematic response coefficient from inflation, $\beta$I, would result in a change in any security return of ___ $\beta$I.

Accepted Answer

A) 9.2 
B) 3.2 
C) -3.2 
D) 3.0 
E) 6.2

Question 13

The Fama-French three factor model predicts the expected return on a portfolio increases:

Accepted Answer

A) linearly with its factor loading of the size factor. 
B) linearly with its factor loading of the volume. 
C) exponentially with its factor loading of the size factor. 
D) exponentially with its factor loading of the volume factor. 
E) None of the above.

Question 14

Style portfolios are characterized by:

Accepted Answer

A) their stock attributes; P/Es less than the market P/E are value funds. 
B) their systematic factors, higher systematic factors are benchmark portfolios. 
C) their stock attributes; higher stock attribute factors are benchmark portfolios. 
D) their systematic factors, P/Es greater than the market are value portfolios. 
E) There is no difference between systematic factors and stock attributes.

Question 15

An investor is considering the three stocks given below:
$\begin{array}{llcc}
 \underline{ \text { Stock }} &   \underline{\text {  Expected} } &\underline{ \text {  Beta}}  \
 &\underline{\text {  Return}} &&\
 \text {A  } &6.0\%&-0.10\
 \text { B } &13.3\%&2.10\
 \text {  C} &9.2\%&.75\
 \text { Market Portfolio } &10.0\%&1.00\
 \text { T-Bills } &7.0\%&0.00\
\end{array}$

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 stocks B and A.

Accepted Answer

The answer of An investor is considering the three stocks...

Question 16

Three factors likely to occur in the APT model are:

Accepted Answer

A) unemployment, inflation, and current rates. 
B) inflation, GNP, and interest rates. 
C) current rates, inflation and change in housing prices. 
D) unemployment, college tuition, and GNP. 
E) This cannot be determined or even estimated.

Question 17

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.

Accepted Answer

A) 4% 
B) 5% 
C) 6% 
D) 7% 
E) 8%

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) Both A and B. 
E) All of the above

Question 19

The acronym CAPM stands for:

Accepted Answer

A) Capital Asset Pricing Model. 
B) Certain Arbitrage Pressure Model. 
C) Current Arbitrage Prices Model. 
D) Cumulative Asset Price Model. 
E) None of the above.

Question 20

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:

Accepted Answer

A) 0.89. 
B) 1.60. 
C) 2.40. 
D) 3.00. 
E) It is impossible to calculate beta without the inflation rate.

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

Calculate the stock's total return if the company announces that an important patent filing has been granted sooner than expected and will earn the company 5% more in return.

A factor is a variable that:

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:

Which of the following statements is/are true?

In the one factor (APT) model, the characteristic line to estimate $\beta$ i passes through the origin, unlike the estimate used in the CAPM because:

A growth stock portfolio and a value portfolio might be characterized:

Parametric or empirical models rely on:

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?

A value company is defined as one that:

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

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

If the expected rate of inflation was 3% and the actual rate was 6.2%; the systematic response coefficient from inflation, $\beta$ _I, would result in a change in any security return of ___ $\beta$ _I.

The Fama-French three factor model predicts the expected return on a portfolio increases:

Style portfolios are characterized by:

Three factors likely to occur in the APT model are:

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.

An advantage of the APT over CAPM is:

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:

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

Calculate the stock's total return if the company announces that an important patent filing has been granted sooner than expected and will earn the company 5% more in return.

A factor is a variable that:

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:

Which of the following statements is/are true?

In the one factor (APT) model, the characteristic line to estimate β\betaβ i passes through the origin, unlike the estimate used in the CAPM because:

A growth stock portfolio and a value portfolio might be characterized:

Parametric or empirical models rely on:

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?

A value company is defined as one that:

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

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

If the expected rate of inflation was 3% and the actual rate was 6.2%; the systematic response coefficient from inflation, β\betaβ I, would result in a change in any security return of ___ β\betaβ I.

The Fama-French three factor model predicts the expected return on a portfolio increases:

Style portfolios are characterized by:

Three factors likely to occur in the APT model are:

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.

An advantage of the APT over CAPM is:

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:

In the one factor (APT) model, the characteristic line to estimate $\beta$ i passes through the origin, unlike the estimate used in the CAPM because:

If the expected rate of inflation was 3% and the actual rate was 6.2%; the systematic response coefficient from inflation, $\beta$ _I, would result in a change in any security return of ___ $\beta$ _I.