Question 1

Assuming that the single factor APT model applies,the beta for the market portfolio is:

Accepted Answer

According to the single factor APT model, the beta for the market portfolio is always assumed to be one. This is because the market portfolio represents the systematic risk present in all securities, and by definition, its beta is one.

Question 2

A factor is a variable that:

Accepted Answer

A factor is a variable that affects the returns of risky assets in a systematic fashion. Factors are the underlying sources of risk and return in an asset or portfolio. These factors can be macroeconomic, financial, or industry-specific and they can affect asset prices in a systematic way. For example, the interest rate factor affects the returns of bonds in a systematic way, and the GDP growth factor affects the returns of stocks in a systematic way.

Question 3

19.For a diversified portfolio including a large number of equitys,the:

Accepted Answer

Diversification reduces unsystematic risk, which is the risk unique to individual stocks. As the number of stocks in a portfolio increases, the unsystematic risk approaches zero, leaving only systematic risk.

Question 4

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

Shareholders typically have already factored in their expectations for a given announcement, meaning that the price change will largely stem from any unexpected information that was revealed.

Question 5

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

Accepted Answer

Betas and factors in the APT adjust the expected return for differences between actual and expected levels of factors. Calculation errors, unsystematic risks, and spurious correlations of factors are not directly related to the APT.

Question 6

A company owning gold mines will probably have a _____ inflation beta because an ___ increase in inflation is usually associated with an increase in gold prices.

Accepted Answer

The answer of A company owning gold mines will probably...

Question 7

A security that has a beta of zero will have an expected return of:

Accepted Answer

A security with a beta of zero has no exposure to market risk and hence its expected return will only compensate for the risk-free rate. Therefore, the expected return will be equal to the risk-free rate.

Question 8

In the one factor (APT)model,the characteristic line to estimate b_i passes through the origin,unlike the estimate used in the CAPM because:

Accepted Answer

In the APT model, the characteristic line measures the change in excess return on a security versus the return on the factor about its mean of zero. This is different from the CAPM model, where the characteristic line measures the relationship between the actual return on a security and the market index. The APT model assumes that there are multiple factors that influence the return on a security, whereas the CAPM assumes that only the market factor is relevant. Due to this difference, the characteristic line in the APT model passes through the origin, while the CAPM model does not necessarily require it to do so.  Therefore, option D is the correct choice.

Question 9

The acronym APT stands for:

Accepted Answer

APT stands for Arbitrage Pricing Theory. It is a financial pricing model that aims to estimate the expected return on an asset based on the relationship between that asset and many other variables.

Question 10

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

Accepted Answer

The unexpected return on a security is composed of both systematic risk (which affects the overall market) and idiosyncratic risk (which is specific to the individual security). Therefore, Choice B, which includes systematic and idiosyncratic risk, is the correct answer. Choices A, C, D, and E are all incorrect as they do not include both systematic and idiosyncratic risk.

Question 11

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

When the market has already discounted the news, it means that they have already factored in the information in the security's price. Therefore, the impact on the market price will be minimal.

Question 12

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

Accepted Answer

The cost of equity capital can be estimated using the CAPM formula, which requires the company's beta, the risk-free rate, and the market risk premium. The financial leverage and industry beta are not necessary for the CAPM calculation. Therefore, the best choice is E, including beta, risk-free rate, and market risk premium.

Question 13

The term Corr($\varepsilon$_R ,$\varepsilon$ _T )= 0 tells us that:

Accepted Answer

Corr(F1F1F1S1F1F1F10 _R ,F1F1F1S1F1F1F10 _T )= 0 means that there is no correlation between the unsystematic risk of companies R and T. It does not give any information about the error terms or systematic risk.

Question 14

What would not be true about a GNP beta?

Accepted Answer

All the statements A, B, C, and D accurately describe aspects of GNP beta, making none of them untrue.

Question 15

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

Accepted Answer

The systematic response coefficient from inflation, b_I, measures the sensitivity or responsiveness of securities returns to changes in inflation. It can be calculated as: b_I = (actual inflation - expected inflation) = (6.2% - 3%) = 3.2% Therefore, a change in any security return would be expected to be 3.2 times the change in inflation based on the given coefficient. Therefore, the answer is B, which is 3.2.

Question 16

The acronym CAPM stands for:

Accepted Answer

CAPM stands for Capital Asset Pricing Model.

Question 17

In a portfolio of risky assets,the response to a factor,F_i ,can be determined by:

Accepted Answer

The correct method to determine the response to a factor in a portfolio of risky assets is by summing the weighted betas and multiplying by the factor. This is because beta measures the sensitivity of an asset's return to changes in the factor, and weighting them by their proportion in the portfolio gives an overall measure of the portfolio's response to the factor. The other options listed are not relevant for determining the response to a factor in a portfolio.

Question 18

A criticism of the CAPM is that it:

Accepted Answer

The CAPM assumes that the risk of an asset can be fully captured by a single measure of systematic risk, typically the beta coefficient. However, this assumption may not hold true in real-world situations where there are multiple sources of risk that cannot be fully captured by a single measure.

Question 19

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

Accepted Answer

Based on the context, R likely represents the actual total return, and U represents the unexpected return. The symbol e typically refers to expected return or mean return, rather than a required or unbiased return. Therefore, choice C is the best option.

Question 20

The single factor APT model that resembles the market model uses _________ as the single factor.

Accepted Answer

The single factor APT model that resembles the market model uses the market return as the single factor. This means that the APT model assumes that the only significant factor that affects asset returns is the market return, and all other factors are negligible.

Quiz 11: Factor Models and the Arbitrage Pricing Theory

Assuming that the single factor APT model applies,the beta for the market portfolio is:

A factor is a variable that:

19.For a diversified portfolio including a large number of equitys,the:

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

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

A company owning gold mines will probably have a ___ inflation beta because an _ increase in inflation is usually associated with an increase in gold prices.

A security that has a beta of zero will have an expected return of:

In the one factor (APT) model,the characteristic line to estimate b_i passes through the origin,unlike the estimate used in the CAPM because:

The acronym APT stands for:

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

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?

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

The term Corr( $\varepsilon$ _R , $\varepsilon$ _T ) = 0 tells us that:

What would not be true about a GNP beta?

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

The acronym CAPM stands for:

In a portfolio of risky assets,the response to a factor,F_i ,can be determined by:

A criticism of the CAPM is that it:

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

The single factor APT model that resembles the market model uses _________ as the single factor.

Quiz 11: Factor Models and the Arbitrage Pricing Theory

Assuming that the single factor APT model applies,the beta for the market portfolio is:

A factor is a variable that:

19.For a diversified portfolio including a large number of equitys,the:

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

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

A company owning gold mines will probably have a _____ inflation beta because an ___ increase in inflation is usually associated with an increase in gold prices.

A security that has a beta of zero will have an expected return of:

In the one factor (APT) model,the characteristic line to estimate bi passes through the origin,unlike the estimate used in the CAPM because:

The acronym APT stands for:

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

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?

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

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

What would not be true about a GNP beta?

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

The acronym CAPM stands for:

In a portfolio of risky assets,the response to a factor,Fi ,can be determined by:

A criticism of the CAPM is that it:

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

The single factor APT model that resembles the market model uses _________ as the single factor.

A company owning gold mines will probably have a ___ inflation beta because an _ increase in inflation is usually associated with an increase in gold prices.

In the one factor (APT) model,the characteristic line to estimate b_i passes through the origin,unlike the estimate used in the CAPM because:

The term Corr( $\varepsilon$ _R , $\varepsilon$ _T ) = 0 tells us that:

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

In a portfolio of risky assets,the response to a factor,F_i ,can be determined by: