# Investments Study Set 2

Business

## Quiz 10 :

Arbitrage Pricing Theory and Multifactor Models of Risk and Return

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Q01

___________ a relationship between expected return and risk.

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C Explanation: Both models attempt to explain asset pricing based on risk/return relationships.

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Q02

Consider the multifactor APT with two factors.Stock A has an expected return of 17.6%, a beta of 1.45 on factor 1, and a beta of .86 on factor 2.The risk premium on the factor 1 portfolio is 3.2%.The risk-free rate of return is 5%.What is the risk-premium on factor 2 if no arbitrage opportunities exist

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A Explanation: 17.6% = 1.45(3.2%) + .86x + 5%; x = 9.26.

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Q03

In a multifactor APT model, the coefficients on the macro factors are often called

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E Explanation: The coefficients are called factor betas, factor sensitivities, or factor loadings.

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Q04

In a multifactor APT model, the coefficients on the macro factors are often called

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Q05

In a multifactor APT model, the coefficients on the macro factors are often called

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Q06

Which pricing model provides no guidance concerning the determination of the risk premium on factor portfolios

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Q07

An arbitrage opportunity exists if an investor can construct a __________ investment portfolio that will yield a sure profit.

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Q08

The APT was developed in 1976 by

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Q09

A _________ portfolio is a well-diversified portfolio constructed to have a beta of 1 on one of the factors and a beta of 0 on any other factor.

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Q10

The exploitation of security mispricing in such a way that risk-free economic profits may be earned is called

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Q11

In developing the APT, Ross assumed that uncertainty in asset returns was a result of

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Q12

The ____________ provides an unequivocal statement on the expected return-beta relationship for all assets, whereas the _____________ implies that this relationship holds for all but perhaps a small number of securities.

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Q13

Consider a single factor APT.Portfolio A has a beta of 1.0 and an expected return of 16%.Portfolio B has a beta of 0.8 and an expected return of 12%.The risk-free rate of return is 6%.If you wanted to take advantage of an arbitrage opportunity, you should take a short position in portfolio __________ and a long position in portfolio _______.

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Q14

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 _________.
A)

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Q15

Consider the one-factor APT.The variance of returns on the factor portfolio is 6%.The beta of a well-diversified portfolio on the factor is 1.1.The variance of returns on the well-diversified portfolio is approximately

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Q16

Consider the one-factor APT.The standard deviation of returns on a well-diversified portfolio is 18%.The standard deviation on the factor portfolio is 16%.The beta of the well-diversified portfolio is approximately

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Q17

Consider the single-factor APT.Stocks A and B have expected returns of 15% and 18%, respectively.The risk-free rate of return is 6%.Stock B has a beta of 1.0.If arbitrage opportunities are ruled out, stock A has a beta of

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Q18

Consider the multifactor APT with two factors.Stock A has an expected return of 16.4%, a beta of 1.4 on factor 1 and a beta of .8 on factor 2.The risk premium on the factor 1 portfolio is 3%.The risk-free rate of return is 6%.What is the risk-premium on factor 2 if no arbitrage opportunities exist

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Q19

Consider the multifactor model APT with two factors.Portfolio A has a beta of 0.75 on factor 1 and a beta of 1.25 on factor 2.The risk premiums on the factor 1 and factor 2 portfolios are 1% and 7%, respectively.The risk-free rate of return is 7%.The expected return on portfolio A is __________ if no arbitrage opportunities exist.

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Q20

Consider the multifactor APT with two factors.The risk premiums on the factor 1 and factor 2 portfolios are 5% and 6%, respectively.Stock A has a beta of 1.2 on factor 1, and a beta of 0.7 on factor 2.The expected return on stock A is 17%.If no arbitrage opportunities exist, the risk-free rate of return is

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