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

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Question 31

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Which of the following factors did Chen, Roll, and Ross include in their multifactor model?

A) Change in industrial waste
B) Change in expected inflation
C) Change in unanticipated inflation
D) Change in expected inflation and unanticipated inflation
E) All of the factors were included in their model.

F) A) and B)
G) A) and C)

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Question 32

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Consider the multifactor APT with two factors. Stock A has an expected return of 16.4%, a beta of 1.4 on factor 1, and a beta of .8 on factor 2. The risk premium on the factor-1 portfolio is 3%. The risk-free rate of return is 6%. What is the risk-premium on factor 2 if no arbitrage opportunities exist?

A) 2%
B) 3%
C) 4%
D) 7.75%

E) None of the above
F) A) and C)

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Question 33

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Consider a single factor APT. Portfolio A has a beta of 1.0 and an expected return of 16%. Portfolio B has a beta of 0.8 and an expected return of 12%. The risk-free rate of return is 6%. If you wanted to take advantage of an arbitrage opportunity, you should take a short position in portfolio __________ and a long position in portfolio _______.

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

The APT was developed in 1976 by

In the APT model, what is the nonsystematic standard deviation of an equally-weighted portfolio that has an average value of σ(e_i ) equal to 18% and 250 securities?

Consider the one-factor APT. The variance of returns on the factor portfolio is 11%. The beta of a well-diversified portfolio on the factor is 1.45. The variance of returns on the well-diversified portfolio is approximately

Which of the following factors were used by Fama and French in their multifactor model?

In a multifactor APT model, the coefficients on the macro factors are often called

Multifactor models, such as the one constructed by Chen, Roll, and Ross, can better describe assets'returns by

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

If you invested in an equally-weighted portfolio of stocks B and C, your portfolio return would be _____________ if economic growth was weak. There are three stocks: A, B, and C You can either invest in these stocks or short sell them. There are three possible states of nature for economic growth in the upcoming year (each equally likely to occur) ; economic growth may be strong, moderate, or weak. The returns for the upcoming year on stocks A, B, and C for each of these states of nature are given below:

The exploitation of security mispricing in such a way that risk-free economic profits may be earned is called

Consider a well-diversified portfolio, A, in a two-factor economy. The risk-free rate is 6%, the risk premium on the first factor portfolio is 4%, and the risk premium on the second factor portfolio is 3%. If portfolio A has a beta of 1.2 on the first factor and .8 on the second factor, what is its expected return?

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

Consider the one-factor APT. The standard deviation of returns on a well-diversified portfolio is 22%. The standard deviation on the factor portfolio is 14%. The beta of the well-diversified portfolio is approximately

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 _______.

Consider the single factor APT. Portfolio A has a beta of 0.2 and an expected return of 13%. Portfolio B has a beta of 0.4 and an expected return of 15%. The risk-free rate of return is 10%. If you wanted to take advantage of an arbitrage opportunity, you should take a short position in portfolio _________ and a long position in portfolio _________.

Consider the multifactor APT. The risk premiums on the factor 1 and factor 2 portfolios are 5% and 3%, respectively. The risk-free rate of return is 10%. Stock A has an expected return of 19% and a beta on factor 1 of 0.8. Stock A has a beta on factor 2 of

Consider the multifactor APT. There are two independent economic factors, F₁ and F₂. The risk-free rate of return is 6%. The following information is available about two well-diversified portfolios: $\begin{array} { c c c c } \text { Portfolio } & \beta \text { on } \mathrm { F } _ { 1 } & \beta \text { on } \mathrm { F } _ { 2 } & \begin{array} { c } \text { Expected } \\\text { Return }\end{array} \\\text { A } & 1.0 & 2.0 & 19 \% \\\text { B } & 2.0 & 0.0 & 12 \% \\\hline\end{array}$ Assuming no arbitrage opportunities exist, the risk premium on the factor F₂ portfolio should be