Question 1

The unexpected return on a security,U,is made up of:

Accepted Answer

A)   market risk and systematic risk.
B)   systematic risk and idiosyncratic risk.
C)   idiosyncratic risk and unsystematic risk.
D)   expected return and market risk.
E)   expected return and idiosyncratic risk.F) A) and C)
G) A) and E)

Question 2

Systematic risk is defined as:

Accepted Answer

A)   a risk that specifically affects an asset or small group of assets.
B)   any risk that affects a large number of assets.
C)   any risk that has a huge impact on the return of a security.
D)   the random component of return.E) B) and D)
F) All of the above

Question 3

You have a 3 factor model to explain returns.Explain what a factor represents in the context of the APT? Each factor is multiplied by a β what do these represent and how do they relate to the actual return?

Accepted Answer

Factor variable that explains some of th...

Question 4

Which of the following statements is true?

Accepted Answer

A)   A well-diversified portfolio has negligible systematic risk.
B)   A well-diversified portfolio has negligible unsystematic risk.
C)   An individual security has negligible systematic risk.
D)   An individual security has negligible unsystematic risk.E) A) and D)
F) B) and C)

Question 5

The betas along with the factors in the APT adjust the expected return for:

Accepted Answer

A)   calculation errors.
B)   unsystematic risks.
C)   spurious correlations of factors.
D)   differences between actual and expected levels of factors.E) A) and B)
F) All of the above

Question 6

The term Corr(ε R,ε T) = 0 tells us that:

Accepted Answer

A)   the error terms of company R and T are 0.
B)   the unsystematic risk of companies R and T is unrelated or uncorrelated.
C)   the correlation between the returns of companies R and T is greater than zero.
D)   the systematic risk companies R and T is unrelated.E) A) and B)
F) B) and C)

Question 7

In the equation R =  + U,the three symbols stand for:

Accepted Answer

A)   average return, expected return, and unexpected return.
B)   required return, expected return, and unbiased return.
C)   actual return, expected return, and unexpected return.
D)   required return, expected return, and unbiased risk.
E)   risk, expected return, and unsystematic risk.F) B) and D)
G) C) and D)

Question 8

In normal market conditions or when the market is rising if a security has a negative beta:

Accepted Answer

A)   the security always has a positive return.
B)   the security has an expected return above the risk-free return.
C)   the security has an expected return less than the risk-free rate.
D)   the security has an expected return equal to the market portfolio.E) A) and B)
F) B) and C)

Question 9

To estimate the cost of equity capital for a firm using APT or CAPM,it is necessary to have:

Accepted Answer

A)   company financial leverage, beta, and the market risk premium.
B)   company financial leverage, beta, and the risk-free rate.
C)   beta, company financial leverage, and the industry beta.
D)   beta, company financial leverage, and the market risk premium.
E)   beta, the risk-free rate, and the market risk premium.F) A) and C)
G) B) and D)

Question 10

To estimate the required return for a security using APT or CAPM,it is necessary to have:

Accepted Answer

A)   last period's return, beta, and the standard deviation.
B)   last period's return, beta, and the risk-free rate.
C)   beta, the market risk premium, and the risk-free rate.
D)   beta, last period's return, and the standard deviation.
E)   beta, last period's return, and the market risk premium.F) A) and B)
G) B) and D)

Question 11

For a diversified portfolio including a large number of stocks,:

Accepted Answer

A)   the weighted average expected return goes to zero.
B)   the weighted average of the betas goes to zero.
C)   the weighted average of the unsystematic risk goes to zero.
D)   the return of the portfolio goes to zero.
E)   the return on the portfolio equals the risk-free rate.F) C) and E)
G) A) and C)

Question 12

An investor is considering the three stocks given below:
A.
Stock B and C: Rp = .5(13.3%) + .5(9.2%) = 11.25%
Stock B and C: β p = .5(2.1) + .5(0.75) = 1.425
Stock B and T-bills: βB&TBILL = .5(2.1) + .5(0) = 1.05
Stock's B and A: βB&A = .5(2.1) + .5(-0.1) = 1.00
C. Demonstrate that holding stock A actually reduces risk by comparing the risk of a portfolio equally weighted between stock B and T-Bills with a portfolio equally weighted between stock B and

Accepted Answer

<img  loading="lazy" src="/assets/images/blured-textbook.svg" class="d-inline m-1" alt="blured image" width="139" height="30"> Calculate the expected return and beta ...

Question 13

Shareholders discount many corporate announcements because of their prior expectations.If an announcement causes the price to change it will mostly be driven by:

Accepted Answer

A)   the expected part of the announcement.
B)   market inefficiency.
C)   the innovation or unexpected part of the announcement.
D)   the systematic risk.E) A) and C)
F) B) and D)

Question 14

If the expected rate of inflation was 3% and the actual rate was 6.2%; the systematic response coefficient from inflation,βI,would result in a change in any security return of:

Accepted Answer

A)   9.2%.
B)   3.2 βI%.
C)   -3.2 βI%.
D)   3.0%.
E)   6.2 βI%.F) All of the above
G) A) and C)

Question 15

An advantage of the APT over CAPM is:

Accepted Answer

A)   APT can handle multiple factors.
B)   if the factors can be properly identified, the APT may have more explanation/predictive power for returns.
C)   the APT forces unsystematic risk to be negative to offset systematic risk; thus making the total portfolio risk free, allowing for an arbitrage opportunity for the astute investor.
D)   APT can handle multiple factors; and if the factors can be properly identified, the APT may have more explanation/predictive power for returns.
E)   All of these.F) C) and D)
G) B) and E)

Question 16

Financial models used to describe returns are based either on a theoretical construct or parametric methods.Parametric models rely on:

Accepted Answer

A)   security betas explaining systematic factor relationships.
B)   finding regularities and relations in past market data.
C)   there being no true explanations of pricing relationships.
D)   always being able to find the exception to the rule.E) C) and D)
F) B) and C)

Question 17

A factor is a variable that:

Accepted Answer

A)   affects the returns of risky assets in a systematic fashion.
B)   affects the returns of risky assets in an unsystematic fashion.
C)   correlates with risky asset returns in a unsystematic fashion.
D)   does not correlate with the returns of risky assets in an systematic fashion.E) B) and D)
F) C) and D)

Question 18

Which of the following is true about the impact on market price of a security when a company makes an announcement and the market has discounted the news?

Accepted Answer

A)   The price will change a great deal; even though the impact is primarily in the future, the future value is discounted to the present.
B)   The price will change little, since the impact is primarily in the future.
C)   The price will change little, since the market considers this information unimportant.
D)   The price will change little, since the market considers this information untrue.
E)   The price will change little, since the market has already included this information in the security's price.F) All of the above
G) B) and E)

Question 19

Both the APT and the CAPM imply a positive relationship between expected return and risk.The APT views risk:

Accepted Answer

A)   very similarly to the CAPM via the beta of the security.
B)   in terms of individual intersecurity correlation versus the beta of the CAPM.
C)   via the industry wide or marketwide factors creating correlation between securities versus the CAPM beta.
D)   the standardized deviation of the covariance.E) All of the above
F) B) and C)

Question 20

The systematic response coefficient for productivity,βP,would produce an unexpected change in any security return of ________ if the expected rate of productivity was 1.5% and the actual rate was 2.25%.

Accepted Answer

A)   0.75(βP) %
B)   -0.75(βP) %
C)   2.25(βP) %
D)   -2.25%E) A) and B)
F) A) and C)

Exam 12: An Alternative View of Risk and Return: the Arbitrage Pricing Theory

To estimate the required return for a security using APT or CAPM,it is necessary to have:

Correct Answer
verified

Financial models used to describe returns are based either on a theoretical construct or parametric methods.Parametric models rely on:

Correct Answer
verified

Correct Answer
verified
Calculate the expected return and beta ...
View Answer

Systematic risk is defined as:

Correct Answer
verified

Both the APT and the CAPM imply a positive relationship between expected return and risk.The APT views risk:

Correct Answer
verified

In the equation R = + U,the three symbols stand for:

Correct Answer
verified

In normal market conditions or when the market is rising if a security has a negative beta:

Correct Answer
verified

To estimate the cost of equity capital for a firm using APT or CAPM,it is necessary to have:

Correct Answer
verified

For a diversified portfolio including a large number of stocks,:

Correct Answer
verified

Which of the following statements is true?

Correct Answer
verified

The term Corr(ε _R,ε _T) = 0 tells us that:

Correct Answer
verified

You have a 3 factor model to explain returns.Explain what a factor represents in the context of the APT? Each factor is multiplied by a β what do these represent and how do they relate to the actual return?

Correct Answer
verified
Factor variable that explains some of th...
View Answer

If the expected rate of inflation was 3% and the actual rate was 6.2%; the systematic response coefficient from inflation,β_I,would result in a change in any security return of:

Correct Answer
verified

A factor is a variable that:

Correct Answer
verified

Which of the following is true about the impact on market price of a security when a company makes an announcement and the market has discounted the news?

Correct Answer
verified

The unexpected return on a security,U,is made up of:

Correct Answer
verified

The betas along with the factors in the APT adjust the expected return for:

Correct Answer
verified

Shareholders discount many corporate announcements because of their prior expectations.If an announcement causes the price to change it will mostly be driven by:

Correct Answer
verified

An advantage of the APT over CAPM is:

Correct Answer
verified

The systematic response coefficient for productivity,β_P,would produce an unexpected change in any security return of ________ if the expected rate of productivity was 1.5% and the actual rate was 2.25%.

Correct Answer
verified

Exam 12: An Alternative View of Risk and Return: the Arbitrage Pricing Theory

To estimate the required return for a security using APT or CAPM,it is necessary to have:

Correct AnswerverifiedShow Answer

Financial models used to describe returns are based either on a theoretical construct or parametric methods.Parametric models rely on:

Correct AnswerverifiedShow Answer

Correct Answerverified Calculate the expected return and beta ...View AnswerShow Answer

Systematic risk is defined as:

Correct AnswerverifiedShow Answer

Both the APT and the CAPM imply a positive relationship between expected return and risk.The APT views risk:

Correct AnswerverifiedShow Answer

In the equation R = + U,the three symbols stand for:

Correct AnswerverifiedShow Answer

In normal market conditions or when the market is rising if a security has a negative beta:

Correct AnswerverifiedShow Answer

To estimate the cost of equity capital for a firm using APT or CAPM,it is necessary to have:

Correct AnswerverifiedShow Answer

For a diversified portfolio including a large number of stocks,:

Correct AnswerverifiedShow Answer

Which of the following statements is true?

Correct AnswerverifiedShow Answer

The term Corr(ε R,ε T) = 0 tells us that:

Correct AnswerverifiedShow Answer

You have a 3 factor model to explain returns.Explain what a factor represents in the context of the APT? Each factor is multiplied by a β what do these represent and how do they relate to the actual return?

Correct AnswerverifiedFactor variable that explains some of th...View AnswerShow Answer

If the expected rate of inflation was 3% and the actual rate was 6.2%; the systematic response coefficient from inflation,βI,would result in a change in any security return of:

Correct AnswerverifiedShow Answer

A factor is a variable that:

Correct AnswerverifiedShow Answer

Which of the following is true about the impact on market price of a security when a company makes an announcement and the market has discounted the news?

Correct AnswerverifiedShow Answer

The unexpected return on a security,U,is made up of:

Correct AnswerverifiedShow Answer

The betas along with the factors in the APT adjust the expected return for:

Correct AnswerverifiedShow Answer

Shareholders discount many corporate announcements because of their prior expectations.If an announcement causes the price to change it will mostly be driven by:

Correct AnswerverifiedShow Answer

An advantage of the APT over CAPM is:

Correct AnswerverifiedShow Answer

The systematic response coefficient for productivity,βP,would produce an unexpected change in any security return of ________ if the expected rate of productivity was 1.5% and the actual rate was 2.25%.

Correct AnswerverifiedShow Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
Calculate the expected return and beta ...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

The term Corr(ε _R,ε _T) = 0 tells us that:

Correct Answer
verified

Correct Answer
verified
Factor variable that explains some of th...
View Answer

If the expected rate of inflation was 3% and the actual rate was 6.2%; the systematic response coefficient from inflation,β_I,would result in a change in any security return of:

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

The systematic response coefficient for productivity,β_P,would produce an unexpected change in any security return of ________ if the expected rate of productivity was 1.5% and the actual rate was 2.25%.

Correct Answer
verified