57.
Which of the following is(are) true regarding the APT?
I) The security market line does not apply to the APT.
II) More than one factor can be important in determining returns.
III) Almost all individual securities satisfy the APT relationship.
IV) It doesn’t rely on the market portfolio that contains all assets.
58.
In a factor model, the return on a stock in a particular period will be related to
59.
Which of the following factors did Chen, Roll, and Ross not include in their multifactor
model?
60.
Which of the following factors did Chen, Roll, and Ross include in their multifactor model?
61.
Which of the following factors were used by Fama and French in their multifactor model?
62.
Consider the single-factor APT. Stocks A and B have expected returns of 12% and 14%,
respectively. The risk-free rate of return is 5%. Stock B has a beta of 1.2. If arbitrage
opportunities are ruled out, stock A has a beta of
63.
Consider the one-factor APT. The standard deviation of returns on a well-diversified
portfolio is 19%. The standard deviation on the factor portfolio is 12%. The beta of the
well-diversified portfolio is approximately
64.
Black argues that past risk premiums on firm-characteristic variables, such as those
described by Fama and French, are problematic because
65.
Multifactor models seek to improve the performance of the single-index model by
66.
Multifactor models, such as the one constructed by Chen, Roll, and Ross, can better
describe assets’ returns by
67.
Consider the multifactor model APT with three factors. Portfolio A has a beta of 0.8 on
factor 1, a beta of 1.1 on factor 2, and a beta of 1.25 on factor 3. The risk premiums on the
factor 1, factor 2, and factor 3 are 3%, 5%, and 2%, respectively. The risk-free rate of
return is 3%. The expected return on portfolio A is __________ if no arbitrage opportunities
exist.
68.
Consider the multifactor APT. The risk premiums on the factor 1 and factor 2 portfolios are
6% and 4%, respectively. The risk-free rate of return is 4%. Stock A has an expected return
of 16% and a beta on factor 1 of 1.3. Stock A has a beta on factor 2 of
69.
Consider a well-diversified portfolio, A, in a two-factor economy. The risk-free rate is 5%,
the risk premium on the first factor portfolio is 4% and the risk premium on the second
factor portfolio is 6%. If portfolio A has a beta of 0.6 on the first factor and 1.8 on the
second factor, what is its expected return?
70.
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 _______.
71.
Consider the single factor APT. Portfolio A has a beta of 0.5 and an expected return of
12%. Portfolio B has a beta of 0.4 and an expected return of 13%. The risk-free rate of
return is 5%. If you wanted to take advantage of an arbitrage opportunity, you should take
a short position in portfolio _________ and a long position in portfolio _________.
72.
Consider the one-factor APT. The variance of returns on the factor portfolio is 9%. The
beta of a well-diversified portfolio on the factor is 1.25. The variance of returns on the
well-diversified portfolio is approximately
P
73.
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
P
74.
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
Short Answer Questions
75.
Discuss the advantages of arbitrage pricing theory (APT) over the capital asset pricing
model (CAPM) relative to diversified portfolios.
76.
Discuss the advantages of the multifactor APT over the single factor APT and the CAPM.
What is one shortcoming of the multifactor APT and how does this shortcoming compare
to CAPM implications?
77.
Discuss arbitrage opportunities in the context of violations of the law of one price.
78.
Discuss the similarities and the differences between the CAPM and the APT with regard
to the following factors: capital market equilibrium, assumptions about risk aversion, risk-
return dominance, and the number of investors required to restore equilibrium.
79.
Security A has a beta of 1.0 and an expected return of 12%. Security B has a beta of 0.75
and an expected return of 11%. The risk-free rate is 6%. Explain the arbitrage opportunity
that exists; explain how an investor can take advantage of it. Give specific details about
how to form the portfolio, what to buy and what to sell.
80.
Name three variables that Chen, Roll, and Ross used to measure the impact of
macroeconomic factors on security returns. Briefly explain the reasoning behind their
model.