Investment Analysis and Portfolio Management 9th Edition TestBank Chapter 9

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CHAPTER 9—MULTIFACTOR MODELS OF RISK AND RETURN TRUE/FALSE

Question: Studies strongly suggest that the CAPM be abandoned and replaced with the

APT. Answer:

Question: The APT does not require a market portfolio. Answer:

Question: Studies indicate that neither firm size nor the time interval used are important

when computing beta. Answer:

Question: Findings by Fama and French that stocks with high Book Value to Market Price

ratios tended to produce larger risk adjusted returns than stocks with low Book Value to

Market Price ratios challenge the efficacy of the CAPM. Answer:

Question: Findings by Basu that stocks with high P/E ratios tended to stocks with low P/E

ratios challenge the efficacy of the CAPM. Answer:

Question: The APT assumes that capital markets are perfectly competitive. Answer:

Question: The APT assumes that security returns are normally distributed. Answer:

Question: In the APT model, the identity of all the factors is known. Answer:

Question: According to the APT model all securities should be priced such that riskless

arbitrage is possible. Answer:

Question: Empirical tests of the APT model have found that as the size of a portfolio

increased so did the number of factors. Answer:

Question: Multifactor models of risk and return can be broadly grouped into models that

use macroeconomic factors and models that use microeconomic factors. Answer:

Question: Arbitrage Pricing Theory (APT) specifies the exact number of risk factors and

their identity. Answer:

Question: A major advantage of the Arbitrage Pricing Theory is the risk factors are clearly

universally identifiable. Answer:

Question: The January Effect is an anomaly where returns in January are significantly

smaller than in any other month. Answer:

Question: One method for estimating the parameters for the Capital Asset Pricing Model is

to estimate a portfolios characteristic line via regression techniques using the single-index

market model. Answer:

USE THE FOLLOWING INFORMATION FOR THE NEXT QUESTION(S)

NARREND Question: Refer to Exhibit 9-1. In the list above which are assumptions of the

Arbitrage Pricing Model?

Answer:

Question: Refer to Exhibit 9-1. Which are not assumptions of the Arbitrage Pricing

model?

Answer:

Question: To date, the results of empirical tests of the Arbitrage Pricing Model have been

Answer:

Question: Unlike the capital asset pricing model, the arbitrage pricing theory requires only

the following assumption(s):

Answer:

Question: Consider the following two factor APT model E(R) = 0 + 1b1 + 2b2

Answer:

Question: In the APT model the idea of riskless arbitrage is to assemble a portfolio that

Answer:

Question: In one of their empirical tests of the APT, Roll and Ross examined the

relationship between a securitys returns and its own standard deviation. A finding of a

statistically significant relationship would indicate that

Answer:

Question: Cho, Elton, and Gruber tested the APT by examining the number of factors in

the return generating process and found that

Answer:

Question: Dhrymes, Friend, and Gultekin, in their study of the APT found that

Answer:

Question: Assume that you are embarking on a test of the small-firm effect using APT. You

form 10 size-based portfolios. The following finding would suggest there is evidence

supporting APT

Answer:

Question: The equation for the single-index market model is

Answer:

Question: The excess return form of the single-index market model is

Answer:

Question: Consider the following list of risk factors:

Which of the following factors would you use to develop a macroeconomic-based risk

factor model?

Answer:

Question: Consider the following list of risk factors:

Which of the following factors would you use to develop a microeconomic-based risk

factor model?

Answer:

Question: In a macro-economic based risk factor model, the following factor would be one

of many appropriate factors.

Answer:

Question: In a multifactor model, confidence risk represents

Answer:

Question: In a multifactor model, time horizon risk represents

Answer:

Question: In a micro-economic (or characteristic) based risk factor model the following

factor would be one of many appropriate factors

Answer:

Question: A study by Chen, Roll, and Ross in 1986 examined all of the following factors in

applying the Arbitrage Pricing Theory (APT) except the

Answer:

Question: Which of the following is not a step required for a multifactor risk model to

estimate expected return for an individual stock position?

Answer:

Question: A 1994 study by Burmeister, Roll, and Ross defined all of the following risk

factors except

Answer:

Question: Under the following conditions, what are the expected returns for stocks X and

Answer:

Question: Under the following conditions, what are the expected returns for stocks Y and

Answer:

Question: Under the following conditions, what are the expected returns for stocks A and

Answer:

Question: Under the following conditions, what are the expected returns for stocks X and

Answer:

Question: Under the following conditions, what are the expected returns for stocks A and

Answer:

Question: Consider a two-factor APT model where the first factor is changes in the 30-year

T-bond rate, and the second factor is the percent growth in GNP. Based on historical

estimates you determine that the risk premium for the interest rate factor is 0.02, and the

risk premium on the GNP factor is 0.03. For a particular asset, the response coefficient for

the interest rate factor is −1.2, and the response coefficient for the GNP factor is 0.80. The

rate of return on the zero-beta asset is 0.03. Calculate the expected return for the asset.

Answer:

USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) Consider the

three stocks, stock X, stock Y and stock Z, that have the following factor loadings (or

factor betas)

The zero-beta return (0) = 3%, and the risk premia are 1 = 10%, 2 = 8%. Assume that all

three stocks are currently priced at $50. NARREND Question: Refer to Exhibit 9-2. The

expected returns for stock X, stock Y, and stock Z are

Answer:

Question: Refer to Exhibit 9-2. The expected prices one year from now for stocks X, Y,

and Z are

Answer:

Question: Refer to Exhibit 9-2. If you know that the actual prices one year from now are

stock X $55, stock Y 52, and stock Z $57, then

Answer:

Question: Refer to Exhibit 9-2. Assume that you wish to create a portfolio with no net

wealth invested. The portfolio that achieves this has 50% in stock X, −100% in stock Y,

and 50% in stock Z. The weighted exposure to risk factor 1 for stocks X, Y, and Z are

Answer:

Question: Refer to Exhibit 9-2. Assume that you wish to create a portfolio with no net

wealth invested. The portfolio that achieves this has 50% in stock X, −100% in stock Y,

and 50% in stock Z. The weighted exposure to risk factor 2 for stocks X, Y, and Z are

Answer:

Question: Refer to Exhibit 9-2. Assume that you wish to create a portfolio with no net

wealth invested and the portfolio that achieves this has 50% in stock X, −100% in stock Y,

and 50% in stock Z. The net arbitrage profit is

Answer:

Question: Refer to Exhibit 9-2. The new prices now for stocks X, Y, and Z that will not

allow for arbitrage profits are

Answer:

Question: The table below provides factor risk sensitivities and factor risk premia for a

three factor model for a particular asset where factor 1 is MP the growth rate in U.S.

industrial production, factor 2 is UI the difference between actual and expected inflation,

and factor 3 is UPR the unanticipated change in bond credit spread.

Calculate the expected excess return for the asset.

Answer:

USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) Stocks A, B,

and C have two risk factors with the following beta coefficients. The zero-beta return (0)

= .025 and the risk premiums for the two factors are (1) = .12 and (0) = .10.

NARREND Question: Refer to Exhibit 9-3. Calculate the expected returns for stocks A, B,

Answer:

Question: Refer to Exhibit 9-3. Assume that stocks A, B, and C never pay dividends and

stocks A, B, and C are currently trading at $10, $20, and $30, respectively. What is the

expected price next year for each stock?

Answer:

Question: Refer to Exhibit 9-3. Suppose that you know that the prices of stocks A, B, and

C will be $10.95, 22.18, and $30.89, respectively. Based on this information

Answer: