31) If you were to consider the CAPM as a one-factor model, then the factor would be the:
A) rate of inflation.
B) market risk premium.
C) GNP.
D) risk-free rate.
E) individual beta of each security or portfolio.
32) Which one of the following statements is true?
A) Both APT and CAPM argue that expected excess return must be proportional to the beta(s).
B) APT and CAPM are the only quantitative approaches to measure expected returns in risky
assets.
C) The factors to be used in the APT are easier to identify than the factor used in the CAPM.
D) CAPM provides the means for a more-detailed estimate of a security’s expected return than
does APT.
E) CAPM assigns a beta of 1 to the market while APT assigns the market a beta of zero.
33) Parametric or empirical models rely:
A) on security betas explaining systematic factor relationships.
B) on finding regularities and relations in past market data.
C) on security returns always being located on the capital market line.
D) solely on factors within the security’s issuing firm’s realm of control.
E) primarily on financial market models and theories.
34) When using the empirical approach, rather than a risk-based model, to compute an expected
rate of return on a security, the beta values are replaced with:
A) the ratio of the market rate of return to the risk-free rate.
B) a singular value equal to the market-to-book value of the firm.
C) the firm’s various attributes.
D) the ratio of the firm’s historical average return to the risk-free rate.
E) the average standard deviation of the security’s historical returns.
35) A growth-stock portfolio is probably best characterized as having a:
A) high PE ratio as compared to the overall market.
B) lower risk premium than the overall market.
C) low level of systematic risk and a high level of unsystematic risk.
D) low PE ratio as compared to the overall market.
E) a lower beta than the overall market.
36) When selecting a benchmark, it is important to match the security or portfolio that will be
evaluated to securities:
A) that have an opposing style.
B) that have identical factor betas for all factors in the pricing model being utilized.
C) that closely mimic the overall market.
D) with the same PE ratios.
E) of similar style that are available for purchase.
37) The Fama-French three-factor model seems to support the notion that higher returns can best
be earned over time on:
A) large, growth stocks.
B) large, value stocks.
C) small, value stocks.
D) small, growth stocks.
E) the overall stock market.
38) The systematic response coefficient for productivity, βp, would produce an unexpected
change in any security return of (βP × ________) if the expected rate of productivity was 1.5
percent and the actual rate was 2.25 percent.
A) .75 percent
B) −.75 percent
C) 2.25 percent
D) − 2.25 percent
E) 1.5 percent
39) Alpha stock has an expected return of 8.2 percent and betas of: βGNP = 1.23; βI = .97; and
βEx = 1.08. This expectation is based on a three-factor model with expected values of: GNP
growth of −1 percent; inflation of 2.4 percent; and export growth of 3.5 percent. However, actual
growth in these factors turns out to be .55 percent, 1.8 percent, and 2.6 percent, respectively.
Assuming there was no unexpected news related specifically to the stock, what was the stock’s
total rate of return?
A) 8.04 percent
B) 8.55 percent
C) 8.47 percent
D) 7.85 percent
E) 8.85 percent
40) Overton Markets stock has an expected return of 7.8 percent and betas of: βGNP = 1.06; βI =
1.01; and βEx = .52. This expectation is based on a three-factor model with expected values of:
GNP growth of 2.6 percent; inflation of 3.1 percent; and export growth of 1.4 percent. However,
actual growth in these factors turns out to be 3.1 percent, 2.6 percent, and .2 percent,
respectively. Calculate the stock’s total return if the company unexpectedly announces that an
important patent filing has been granted sooner than expected and will earn the company 5
percent more in return, (i.e. from 10 percent up to 15 percent).
A) 16.02 percent
B) 12.20 percent
C) 11.55 percent
D) 10.90 percent
E) 11.02 percent
41) Outdoor Products stock has an expected return of 12.6 percent and betas of: βGNP = 1.52; βI
= 1.06; and βEx = 1.28. This expectation is based on a three-factor model with expected values
of: GNP growth of 3.2 percent; inflation of 2.9 percent; and export growth of 2.2 percent.
However, actual growth in these factors turns out to be 3.6 percent, 3.2 percent, and 2.5 percent,
respectively. Calculate the stock’s total return if the company unexpectedly announces they had
an industrial accident and the operating facilities will close down temporarily which will reduce
the return by 7 percent (from 10 percent down to 3 percent).
A) −4.05 percent
B) 6.91 percent
C) 3.57 percent
D) 7.42 percent
E) −1.85 percent
42) Suppose you identified three important systematic risk factors given by exports, inflation,
and industrial production. At the beginning of the year, a firm’s stock return is estimated at 9.6
percent and the growth in the three factors is estimated at −1 percent, 2.5 percent, and 3.5
percent, respectively. The factor betas are: βEX = 1.8, βI = .7, and βIP = 1. What would be the
stock’s total return if the actual growth in each of the factors was equal to the expected growth
and no unexpected company news occurred?
A) 4.6 percent
B) 5.9 percent
C) 9.6 percent
D) 14.6 percent
E) 8.7 percent
43) The systematic response coefficient for productivity, βp, would produce an unexpected
change in any security return of [βP × ________] if the expected rate of productivity was 1.8
percent and the actual rate was 2.2 percent.
A) .4 percent
B) −.4 percent
C) 2.2 percent
D) −2.2 percent
E) 1.8 percent
44) Assume the single-factor APT model applies and a portfolio exists such that half of the funds
are invested in risky Security Q and the rest in a risk-free asset. Security Q has a beta of 1.8. The
portfolio has a factor beta of:
A) 0.
B) .8.
C) .9.
D) 1.
E) 1.8.
45) Assume the single-factor model applies and a portfolio exists such that 65 percent of the
funds are invested in risky Security Q and the rest in the risk-free asset. Security Q has a beta of
1.5. The portfolio has a beta of:
A) 1.500.
B) .925.
C) .650.
D) .975.
E) 1.000.
46) Assume a one-factor model where the factor is associated with the overall market. Suppose
JSC’s common stock has a factor beta of .8, the risk-free rate is 3.2 percent, and the expected
market rate of return is 11.2 percent. What is the expected return for JSC stock?
A) 10.25 percent
B) 6.40 percent
C) 7.20 percent
D) 9.60 percent
E) 12.16 percent
47) Suppose ABC’s common stock has a return of 12.87 percent, the risk-free rate is 2.65
percent, the market return is 13.46 percent, and there is currently no unsystematic influence
affecting ABC’s return. Given a one-factor APT model, what is the factor beta?
A) .896
B) .945
C) 1.003
D) .962
E) .979
48) Suppose a sizeable, fully diversified portfolio has an F1 beta of .9, an F2 beta of 1.4, and an
expected return of 11.6 percent. If F1 turns out to be 1.1 percent and F2 is −.8 percent, what will
be the actual rate of return based on a two-factor arbitrage pricing model?
A) 12.05 percent
B) 11.47 percent
C) 11.72 percent
D) 12.32 percent
E) 12.58 percent
49) Suppose Binder Corporation’s common stock has an actual return of 12.34 percent compared
to its expected return of 12.6 percent. The risk-free rate was expected to be 4.3 percent, which it
was. The beta of Fi is .9 and the beta of FGNP is 1.1. If inflation unexpectedly increased by 1.4
percent, what was the unexpected change in GNP?
A) 2.02 percent
B) 1.38 percent
C) −.82 percent
D) −1.38 percent
E) −2.02 percent
50) In a multifactor model, explain what a factor represents and the role that beta plays in
relation to factors. How do factors and betas affect the actual return?
51) Verbally describe a graph that illustrates the one-factor model.
52) Explain the conceptual differences in the theoretical development of the CAPM and the
APT.
53) Explain the concept of a benchmark and why benchmarks provide value when evaluating the
performance of a security or portfolio.