Question 1

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. 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%.

Accepted Answer

A)   -4.05%
B)   -2.05%
C)   4.55%
D)   0.40%
E)   1.85% B

Question 2

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

Question 3

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

Accepted Answer

A)   summing the weighted βi s and multiplying by the innovation in Fi.
B)   summing the Fi s.
C)   adding the average weighted expected returns.
D)   Summing the weighted random errors. A

Question 4

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.

Question 5

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:

Accepted Answer

A)   0.00.
B)   0.50.
C)   0.75.
D)   1.00.
E)   1.50.

Question 6

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

Accepted Answer

A)   no effect on Company B's stock price because it is a systematic risk element.
B)   no effect on Company B's stock price because it is an unsystematic risk element.
C)   a large effect on Company B's stock price because it is a systematic risk element.
D)   a large effect on Company B's stock price because it is an unsystematic risk element.

Question 7

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.

Question 8

A criticism of the CAPM is that it:

Accepted Answer

A)   ignores the return on the market portfolio.
B)   ignores the risk-free return.
C)   requires a single measure of systematic risk.
D)   utilizes too many factors.

Question 9

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.

Question 10

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%.

Accepted Answer

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

Question 11

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

Accepted Answer

The answer of Explain the conceptual differences in the theoretical...

Question 12

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

Accepted Answer

A)   zero.
B)   the market risk premium.
C)   the risk free rate.
D)   less than the risk free rate but not negative.
E)   less than the risk free rate which can be negative.

Question 13

In the One Factor (APT)Model,the characteristic line to estimate βi 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 change in the factor about its mean of zero.

Question 14

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

Accepted Answer

A)   arbitrage fees
B)   GNP
C)   the inflation rate
D)   the market return
E)   the risk-free return

Question 15

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 16

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.

Question 17

The acronym APT stands for:

Accepted Answer

A)   Above Par Terms.
B)   Absolute Profit Technique.
C)   Arbitrage Pricing Theory.
D)   Asset Puting Theory.
E)   Assured Price Techniques.

Question 18

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. If the expected return on the stock is 6%,and no unexpected news concerning the stock surfaces,calculate the stock's total return.

Accepted Answer

A)   2.95%
B)   4.95%
C)   6.55%
D)   7.40%
E)   8.85%

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.

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.

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