Question 1

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

Accepted Answer

To determine the response to a factor in a portfolio of risky assets, one needs to calculate the weighted average of the asset betas (β) with respect to that factor and then multiply it by the innovation in the factor. This can be done by summing the weighted βs of all assets in the portfolio and then multiplying that by the innovation in the factor. Hence, choice A is the correct answer. Choices B, C, and D do not provide a valid approach to determine the response to a factor.

Question 2

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

Accepted Answer

A negative beta suggests that the security moves in the opposite direction of the market. In normal market conditions or when the market is rising, a security with a negative beta is expected to have a lower return than the risk-free rate, as the market is moving in the opposite direction of the security's price. Therefore, choice C is the correct answer.

Question 3

Which of the following statements is true?

Accepted Answer

A well-diversified portfolio has negligible unsystematic risk because diversification helps to eliminate or greatly reduce the unsystematic risk associated with individual securities. However, systematic risk cannot be eliminated through diversification as it affects the market as a whole. Therefore, statement A and C are false while statement D is only partially true.

Question 4

In the One Factor (APT)Model,the characteristic line to estimate βi passes through the origin,unlike the estimate used in the CAPM because:

Accepted Answer

In the One Factor (APT) Model, the characteristic line to estimate βi passes through the origin because the relationship measures the change in excess return on a security versus the change in the factor about its mean of zero. This is different from the CAPM, which measures the relationship between the actual return on a security and the market index. Option B is also partly correct, but it is not the fundamental reason why the characteristic line passes through the origin. Option C is not relevant to the One Factor (APT) Model.

Question 5

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

Accepted Answer

The APT views risk in terms of industry-wide or market-wide factors creating correlation between securities, rather than just the beta of the security like the CAPM. Therefore, both models imply a positive relationship between expected return and risk, but they differ in their approach to measuring and understanding risk. Choice A is incorrect because the APT does not view risk very similarly to the CAPM via the beta of the security. Choice B is incorrect because the APT does not focus solely on individual intersecurity correlation like this option suggests. Choice D is incorrect because the APT does not measure risk in terms of the standardized deviation of the covariance.

Question 6

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:

Accepted Answer

The formula to calculate the change in security return in response to unexpected inflation is: β_I × (actual inflation rate - expected inflation rate) Substituting the given values, we get: β_I × (6.2% - 3%) = 0.032 β_I or 3.2 β_I% Therefore, the change in security return would be 3.2 β_I%. Option B is the correct answer.

Question 7

Assume that the single factor APT model applies and a portfolio exists such that 2/3 of the funds are invested in Security Q and the rest in the risk-free asset.Security Q has a beta of 1.5.The portfolio has a beta of:

Accepted Answer

The answer of Assume that the single factor APT model...

Question 8

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

Accepted Answer

- R represents actual return 
- U represents unexpected return (also known as unanticipated return) 
- The middle term (11ea8884_984d_3a3d_a96f_0756bb86648c_TB5261_00) appears to be a placeholder or error, as it does not fit with any of the given options.

Question 9

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 the information has already been factored into the security's price. Therefore, any impact from the news has already been reflected in the current market price, and little to no change is expected to occur.

Question 10

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%.

Accepted Answer

The unexpected change in security return is calculated as the difference between the actual and expected productivity rates, which is 2.25% - 1.5% = 0.75%. This difference is then multiplied by the systematic response coefficient for productivity, β_P, resulting in 0.75(β_P)%.

Question 11

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

Accepted Answer

The betas in the Arbitrage Pricing Theory (APT) adjust the expected return for differences between actual and expected levels of factors, reflecting how sensitive the asset's returns are to changes in these factors.

Question 12

Systematic risk is defined as:

Accepted Answer

Systematic risk, also known as market risk, refers to any risk that affects a large number of assets, such as changes in interest rates, natural disasters, or global economic events. These factors cannot be diversified away through portfolio management, as they impact the entire market.

Question 13

If company A makes a new product discovery and their stock rises 5% this will have:

Accepted Answer

Unsystematic risk is specific to a single company or industry. Therefore, a new product discovery by Company A would be considered an unsystematic risk and would not typically affect the stock price of a different company, Company B, unless they are directly related in the same industry or supply chain.

Question 14

A factor is a variable that:

Accepted Answer

A factor is a variable that affects the returns of risky assets in a systematic fashion, meaning that it has a predictable relationship with asset returns across a broad range of securities. Factors can include macroeconomic variables such as interest rates, inflation, and GDP, as well as industry-specific factors such as earnings growth and volatility.

Question 15

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 factor represents the overall performance of the market and is a key determinant of the returns of individual securities.

Question 16

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

Accepted Answer

The unexpected return on a security is made up of systematic risk and idiosyncratic risk. Systematic risk is the risk that affects the overall market and cannot be diversified away, while idiosyncratic risk is the risk that is specific to a particular company or industry and can be diversified away. The unexpected return is the deviation of the actual return from the expected return, which is based on the systematic risk of the security. Therefore, the best choice is B, which includes both systematic risk and idiosyncratic risk in the unexpected return.

Question 17

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

Accepted Answer

Corr(ε _R,ε _T)= 0 means that the correlation between the error terms of companies R and T is zero, indicating that there is no relationship between the unsystematic risk of the two companies. Therefore, option B is correct. The other options are incorrect as they do not correctly interpret the meaning of the correlation coefficient.

Question 18

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 are likely to have already factored in their prior expectations into the stock price, which means that any changes in the price will mostly be driven by the unexpected or innovative part of the announcement. This is because this new information impacts their existing beliefs and expectations and can cause them to reassess their valuation of the company. Option A is incorrect because expected information is already priced in and thus would not cause a change in the stock price. Option B is unlikely because the stock market is generally assumed to be efficient, meaning that all available information is already reflected in the current stock price. Option D (systematic risk) is also not the best answer as it refers to the risk associated with the entire market, rather than a specific corporate announcement.

Question 19

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

Accepted Answer

The weighted average of the unsystematic risk (also known as idiosyncratic or specific risk) tends to go to zero in a well-diversified portfolio. This is because unsystematic risks, which are unique to individual investments, can be nearly eliminated through diversification. Systematic risk, or market risk, remains.

Question 20

The acronym APT stands for:

Accepted Answer

APT stands for Arbitrage Pricing Theory, which is a financial model used to analyze and estimate the expected return of an asset based on its relationship with other assets and factors.

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

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

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

Which of the following statements is true?

In the One Factor (APT) Model,the characteristic line to estimate βi passes through the origin,unlike the estimate used in the CAPM because:

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

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:

Assume that the single factor APT model applies and a portfolio exists such that 2/3 of the funds are invested in Security Q and the rest in the risk-free asset.Security Q has a beta of 1.5.The portfolio has a beta of:

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

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?

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%.

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

Systematic risk is defined as:

If company A makes a new product discovery and their stock rises 5% this will have:

A factor is a variable that:

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

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

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

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

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

The acronym APT stands for:

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

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

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

Which of the following statements is true?

In the One Factor (APT) Model,the characteristic line to estimate βi passes through the origin,unlike the estimate used in the CAPM because:

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

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:

Assume that the single factor APT model applies and a portfolio exists such that 2/3 of the funds are invested in Security Q and the rest in the risk-free asset.Security Q has a beta of 1.5.The portfolio has a beta of:

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

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?

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%.

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

Systematic risk is defined as:

If company A makes a new product discovery and their stock rises 5% this will have:

A factor is a variable that:

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

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

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

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

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

The acronym APT stands for:

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

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:

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%.

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