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Exam 9: Alternative Risky Asset Pricing Models

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Question 21

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The arbitrage pricing theory was developed by _________.

A) Henry Markowitz
B) Stephen Ross
C) William Sharpe
D) Eugene Fama

E) C) and D)
F) B) and C)

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Question 22

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$\begin{array}{|l|l|l|l|}\hline \text { Factor } & {\left[\mathrm{E}\left(\mathrm{R}_{\mathrm{M}}\right) -\mathrm{R}_{\mathrm{F}}\right) } & \mathrm{SMB} & \mathrm{HML} \\\hline \text { Sensitivity } & \mathrm{b}_{\mathrm{i}}=0.60 & \mathrm{~s}_{\mathrm{i}}=-0.44 & \mathrm{~h}_{\mathrm{i}}=0.28 \\\hline \text { Risk premium } & 12.7 \% & -2.17 \% & 3.25 \% \\\hline\end{array}$ -Assume the Fama-French model is the correct model to price assets.If an asset has the above sensitivities and the risk-free rate is 5%,what is the asset's expected return?

A) $16.1 \%$
B) $15.2 \%$
C) $14.5 \%$
D) $20.5 \%$

E) C) and D)
F) B) and C)

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Question 23

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$\begin{array}{|l|l|l|l|}\hline \text { Factor } & {\left[\mathrm{E}\left(\mathrm{R}_{\mathrm{M}}\right) -\mathrm{R}_{\mathrm{F}}\right) } & \mathrm{SMB} & \mathrm{HML} \\\hline \text { Sensitivity } & \mathrm{b}_{\mathrm{i}}=1.75 & \mathrm{~s}_{\mathrm{i}}=-0.80 & \mathrm{~h}_{\mathrm{i}}=0.60 \\\hline \text { Risk premium } & 18.5 \% & 5.25 \% & 0.50 \% \\\hline\end{array}$ -Suppose the above asset is observed in the market trading with an expected return of 28%.What strategy would you suggest to profit from this situation,assuming the Fama-French model was the correct pricing model and the risk-free rate was 8%?

The most significant conceptual difference between the arbitrage pricing theory (APT) and the capital asset pricing model (CAPM) is that the CAPM _____________.

One of the main problems with the arbitrage pricing theory is __________.

$\begin{array}{|l|l|l|l|}\hline \text { Factor } & {\left[\mathrm{E}\left(\mathrm{R}_{\mathrm{M}}\right) -\mathrm{R}_{\mathrm{F}}\right) } & \mathrm{SMB} & \mathrm{HML} \\\hline \text { Sensitivity } & \mathrm{b}_{\mathrm{i}}=0.60 & \mathrm{~s}_{\mathrm{i}}=-0.44 & \mathrm{~h}_{\mathrm{i}}=0.28 \\\hline \text { Risk premium } & 12.7 \% & -2.17 \% & 3.25 \% \\\hline\end{array}$ -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 _________.

Which of the following is NOT a risk premium incorporated in the Fama and French (1992) three-factor model of expected returns?

An asset in the Australian market has a consumption beta of 0.5.If the variance of the asset is 0.024 and the variance of the growth rate in consumption is 0.035,what is the asset's covariance with the growth rate in consumption?

The three factors that appear to be most relevant when testing the APT relate to:

The ICAPM has been extended to a two-factor version by Adler and Dumas (1983) that incorporates what additional type of risk?

According to the CCAPM,if the expected return on the market return is 7% and the risk-free rate is 5%,the expected return on a portfolio with a consumption beta of 1.5 is 3.1%.

A major difference between the application of the ICAPM compared with the domestic CAPM is:

Calculate the consumption beta for an asset with a standard deviation of 10%,where the variance of consumption growth is 10% and the covariance between the growth rate in consumption and the asset is 0.015.

Calculate the consumption beta for an asset with a variance of 10%,where the variance of consumption growth is 15% and the covariance between the growth rate in consumption and the asset is 20%.

$\begin{array}{|l|l|l|l|}\hline \text { Factor } & {\left[\mathrm{E}\left(\mathrm{R}_{\mathrm{M}}\right) -\mathrm{R}_{\mathrm{F}}\right) } & \mathrm{SMB} & \mathrm{HML} \\\hline \text { Sensitivity } & \mathrm{b}_{\mathrm{i}}=0.60 & \mathrm{~s}_{\mathrm{i}}=-0.44 & \mathrm{~h}_{\mathrm{i}}=0.28 \\\hline \text { Risk premium } & 12.7 \% & -2.17 \% & 3.25 \% \\\hline\end{array}$ -An asset has the above sensitivity to the market portfolio and the risk-free rate is 6%.If an investor uses the CAPM model,but the Fama-French model is the correct model,by how much is the asset's expected return differ?

The international capital asset pricing model (ICAPM) assumes:

The APT of Ross requires the assumption of quadratic utility.

Using Solnik's (1974) ICAPM,what is the expected return on an Australian security with a world market beta of 1.2 if the Australian risk-free rate is 7%,the world risk-free rate is 3.5% and the expected return on the world market portfolio is 22%?

If the ICAPM beta is 0.8,and the world market return and risk-free rate are 12% and 5% respectively,then the expected return predicted by the ICAPM is:

Which of the following is an issue associated with the calculation of consumption for practical application in the CCAPM?