Chapter 07 – Asset Pricing Models
130. A 1994 study by Burmeister, Roll, and Ross defined all of the following risk factors EXCEPT
a.
confidence risk
b.
market risk.
c.
inflation risk.
d.
market-timing risk.
e.
business cycle risk.
131. Which of the following is not a step required for a multifactor risk model to estimate expected return for an
individual stock position?
a.
identify a set of K common risk factors
b.
estimate the risk premia for the factors
c.
estimate the sensitivities of each stock to these K factors
d.
calculate the expected returns using linear programming analysis
e.
All of these are correct.
132. One approach for using multifactor models is to use factors that capture systematic risk. Which of the following is
NOT a common factor used in this approach?
a.
b.
c.
d.
e.
133. Fama and French suggest a three-factor model approach. Which of the following is NOT included in their approach?
a.
excess returns to a broad market index
b.
return differences between small-cap and large-cap portfolios
c.
return differences between industry characteristics
d.
return differences between value and growth stocks
e.
return differences between foreign stocks
134. Under the following conditions, what are the expected returns for stocks X and Y?
0 = 0.04
bx,1 = 1.2
k1 = 0.035
bx,2 = 0.75
k2 = 0.045
by,1 = 0.65
by,2 = 1.45
a.
11.58 percent and 12.8 percent
b.
15.65 percent and 18.23 percent
c.
13.27 percent and 15.6 percent
d.
18.2 percent and 16.45 percent
e.
22.35 percent and 13.25 percent
135. Under the following conditions, what are the expected returns for stocks Y and Z?
0 = 0.05
by,1 = 0.75
k1 = 0.06
by,2 = 1.35
k2 = 0.05
bz,1 = 1.5
bz,2 = 0.85
a.
17.61 percent and 13.23 percent
b.
16.25 percent and 18.25 percent
c.
13.24 percent and 28.46 percent
d.
14.83 percent and 17.69 percent
e.
15.35 percent and 19.25 percent
136. Under the following conditions, what are the expected returns for stocks A and B?
0 = 0.035
ba,1 = 1.00
k1 = 0.05
ba,2 = 1.40
k2 = 0.06
bb,1 = 1.70
bb,2 = 0.65
a.
14.8 percent and 13.8 percent
b.
19.8 percent and 29.5 percent
c.
16.0 percent and 19.8 percent
d.
16.9 percent and 15.9 percent
e.
19.5 percent and 17.5 percent
137. Under the following conditions, what are the expected returns for stocks X and Y?
0 = 0.05
bx,1 = 0.90
k1 = 0.03
bx,2 = 1.60
k2 = 0.04
by,1 = 1.50
by,2 = 0.85
a.
14.1 percent and 12.9 percent
b.
12.5 percent and 19.5 percent
c.
19.5 percent and 18.5 percent
d.
21.2 percent and 18.5 percent
e.
11.5 percent and 15.5 percent
138. Under the following conditions, what are the expected returns for stocks A and C?
0 = 0.07
ba,1 = 0.95
k1 = 0.04
ba,2 = 1.10
k2 = 0.03
bc,1 = 1.10
bc,2 = 2.35
a.
14.1 percent and 17.65 percent
b.
14.1 percent and 18.45 percent
c.
17.65 percent and 18.45 percent
d.
18.45 percent and 17.52 percent
e.
19.55 percent and 17.25 percent
139. Consider a two-factor APT model in which 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.
a.
5.0 percent
b.
2.4 percent
c.
−3.0 percent
d.
−2.4 percent
e.
3.0 percent
Exhibit 7.9
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Consider the three stocks, stock X, stock Y, and stock Z, that have the following factor loadings (or factor betas).
Stock
Factor 1 Loading
Factor 2 Loading
X
−0.55
1.2
Y
−0.10
0.85
Z
0.35
0.5
140. Refer to Exhibit 7.9. The expected returns for stock X, stock Y, and stock Z are
a.
3 percent, 8 percent, 10 percent
b.
7.1 percent, 10.5 percent, 8.8 percent
c.
7.1 percent, 8.8 percent, 10.5 percent
d.
10 percent, 5.5 percent, 14 percent
Chapter 07 – Asset Pricing Models
e.
14 percent, 5.5 percent, 12 percent
141. Refer to Exhibit 7.9. The expected prices one year from now for stocks X, Y, and Z are
a.
$53.55, $54.4, $55.25
b.
$45.35, $54.4, $55.25
c.
$55.55, $56.35, $57.15
d.
$50, $50, $50
e.
$51.35, $47.79, $51.58.
142. Refer to Exhibit 7.9. If you know that the actual prices one year from now are stock X $55, stock Y $52, and stock Z
$57, then
a.
stock X is undervalued, stock Y is undervalued, and stock Z is undervalued.
b.
stock X is undervalued, stock Y is overvalued, and stock Z is overvalued.
c.
stock X is overvalued, stock Y is undervalued, and stock Z is undervalued.
d.
stock X is undervalued, stock Y is overvalued, and stock Z is undervalued.
e.
stock X is overvalued, stock Y is overvalued, and stock Z is undervalued.
143. Refer to Exhibit 7.9. Assume that you wish to create a portfolio with no net wealth invested. The portfolio that
achieves this has 50 percent in stock X, −100 percent in stock Y, and 50 percent in stock Z. The weighted exposure to risk
factor 1 for stocks X, Y, and Z are
a.
0.50, −1.0, 0.50.
b.
−0.50, 1.0, −0.50.
c.
0.60, −0.85, 0.25.
d.
−0.275, 0.10, 0.175.
e.
0.40, −0.75, 0.25.
144. Refer to Exhibit 7.9. Assume that you wish to create a portfolio with no net wealth invested. The portfolio that
achieves this has 50 percent in stock X, −100 percent in stock Y, and 50 percent in stock Z. The weighted exposure to risk
factor 2 for stocks X, Y, and Z are
a.
0.50, −1.0, 0.50.
b.
−0.50, 1.0, −0.50.
c.
0.60, −0.85, 0.25.
d.
−0.275, 0.10, 0.175.
e.
0.40, −0.75, 0.25.
145. Refer to Exhibit 7.9. Assume that you wish to create a portfolio with no net wealth invested and the portfolio that
achieves this has 50 percent in stock X, −100 percent in stock Y, and 50 percent in stock Z. The net arbitrage profit is
a.
$8.
Chapter 07 – Asset Pricing Models
b.
$5.
c.
$7.
d.
$12.
e.
$15.
146. Refer to Exhibit 7.9. The new prices now for stocks X, Y, and Z that will not allow for arbitrage profits are
a.
$53.55, $54.4, and $55.25.
b.
$45.35, $54.4, and $55.25.
c.
$55.55, $56.35, and $57.15.
d.
$50, $50, and $50.
e.
$51.35, $47.79, and $51.58.
147. 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).
Risk Factor
Factor Sensitivity()
Risk Premium()
MP
1.76
0.0259
UI
−0.8
−0.0432
UPR
0.87
0.0149
Calculate the expected excess return for the asset.
a.
12.32 percent
b.
9.32 percent
c.
4.56 percent
Chapter 07 – Asset Pricing Models
d.
6.32 percent
e.
8.02 percent
Exhibit 7.10
USE THE INFORMATION BELOW FOR THE FOLLOWING 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.
Stock
Factor 1 bi1
Factor 2 bi2
A
−0.25
1.1
B
−0.05
0.9
C
0.01
0.6
148. Refer to Exhibit 7.10. Calculate the expected returns for stocks A, B, and C.
A B C
a.
0.082 0.091 0.033
b.
0.105 0.109 0.032
c.
0.132 0.128 0.033
d.
0.165 0.121 0.032
e.
0.850 0.850 0.610
149. Refer to Exhibit 7.10. Assume that stocks A, B, and C never pay dividends and stocks A, B, and C are currently
Chapter 07 – Asset Pricing Models
trading at $10, $20, and $30, respectively. What is the expected price next year for each stock?
A B C
a.
$10.82 $21.82 $30.99
b.
$11.05 $22.18 $30.96
c.
$11.32 $22.56 $30.99
d.
$11.65 $22.42 $30.96
e.
$18.50 $37.00 $48.30
150. Refer to Exhibit 7.10. 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,
a.
all three stocks are overvalued.
b.
all three stocks are undervalued.
c.
stock a is undervalued, stock b is properly valued, and stock c is undervalued.
d.
stock a is undervalued, stock b is properly valued, and stock c is overvalued.
e.
stock a is overvalued, stock b is overvalued, and stock c is undervalued.
151. Under the following conditions, what are the expected returns for stocks Y and Z?
0 = 0.04
by,1 = 0.5
k1 = 0.07
by,2 = 1.3
k2 = 0.05
bz,1 = 1.2
bz,2 = 0.9
a.
12.0 percent and 13.3 percent
Chapter 07 – Asset Pricing Models
b.
13.5 percent and 14.2 percent
c.
13.9 percent and 15.6 percent
d.
14.0 percent and 16.9 percent
e.
15.8 percent and 17.3 percent
152. Under the following conditions, what are the expected returns for stocks A and B?
0 = 0.03
ba,1 = 1.5
k1 = 0.09
ba,2 = 0.8
k2 = 0.07
bb,1 = 1.20
bb,2 = 0.6
a.
24.8 percent and 19.7 percent
b.
22.1 percent and 18.0 percent
c.
20.3 percent and 17.8 percent
d.
19.9 percent and 16.9 percent
e.
18.7 percent and 15.3 percent