Question 1

A value company is defined as one that:
A)tends to have a lower average return than a growth company.
B)tends to have higher average return than a growth company.
C)has a high ratio of book equity to market equity.
D)a and b.
E)a and c.

Accepted Answer

The answer of A value company is defined as one...

Question 2

Both the APT and the CAPM imply a positive relationship between expected return and risk.The APT views risk:
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.
D)as the standardized deviation of the covariance.
E)None of the above.

Accepted Answer

The APT views risk in terms of industry wide or marketwide factors creating correlation between securities. It does not rely on the beta of the security or individual intersecurity correlation like the CAPM does. The standardized deviation of the covariance also does not factor into the APT model.

Question 3

The Fama-French three factor model includes the following factors:
A)beta,expected return on the market,risk free rate of interest,a size factor,and a value factor.
B)the market risk premium,a volume factor,and a size factor.
C)beta,expected return on the market,risk free rate of interest,a volume factor,and a value factor.
D)the yield on corporate bonds,a size factor,and a market factor.
E)None of the above.

Accepted Answer

The Fama-French three factor model includes beta, expected return on the market, risk-free rate of interest, a size factor, and a value factor. Option B is incorrect as it includes only a market risk premium, a volume factor, and a size factor. Option C is also incorrect as it includes a volume factor, which is not a part of the Fama-French three factor model. Option D is incorrect as it includes the yield on corporate bonds, which is not a factor in the Fama-French three factor model.

Question 4

The Fama-French three factor model predicts the expected return on a portfolio increases:
A)linearly with its factor loading of the size factor.
B)linearly with its factor loading of the volume.
C)exponentially with its factor loading of the size factor.
D)exponentially with its factor loading of the volume factor.
E)None of the above.

Accepted Answer

The Fama-French three factor model predicts that the expected return on a portfolio increases linearly with its factor loading of the size factor. The size factor represents the excess returns of small stocks over large stocks, and the model suggests that investors should be compensated for taking on more risk by investing in smaller stocks. Therefore, as the factor loading of the size factor increases, the expected return on the portfolio should increase in a linear fashion.

Question 5

Calculate the stock's total return if the company announces that they had an industrial accident and the operating facilities will close down for some time thus resulting in a loss by the company of 7% in return.
A)-4.05%
B)-2.05%
C)4.55%
D)0.40%
E)1.85%

Accepted Answer

R = 4.95% - 7% = -2.05%.

Question 6

Assume that the single factor APT model applies and a portfolio exists such that 1/2 of the funds are invested in Security Q and the rest in the risk-free asset.Security Q has a beta of 1.8.The portfolio has a beta of:
A)0.0
B)0.8
C)0.9
D)1.0
E)1.8

Accepted Answer

1/2(1.8)+ 1/2(0)= 0.9

Question 7

Suppose the MiniCD Corporation's common stock has a return of 12%.Assume the risk-free rate is 4%,the expected market return is 9%,and no unsystematic influence affected Mini's return.The beta for MiniCD is:
A)0.89.
B)1.60.
C)2.40.
D)3.00.
E)It is impossible to calculate beta without the inflation rate.

Accepted Answer

12 = 4 + F1F1F1S1F1F1F10(9 - 4);8 = 5F1F1F1S1F1F1F10;F1F1F1S1F1F1F10 = 8/5 = 1.60

Question 8

Three factors likely to occur in the APT model are:
A)unemployment,inflation,and current rates.
B)inflation,GNP,and interest rates.
C)current rates,inflation and change in housing prices.
D)unemployment,college tuition,and GNP.
E)This cannot be determined or even estimated.

Accepted Answer

The APT (Arbitrage Pricing Theory) model suggests that asset prices are influenced by multiple factors or systematic risks. The factors mentioned in option B- inflation, GNP (Gross National Product), and interest rates- are some of the most commonly used in the APT model.

Question 9

A growth stock portfolio and a value portfolio might be characterized:
A)each by their P/E relative to the index P/E;high P/E for growth and lower for value.
B)as earning a high rate of return for a growth security and a low rate of return for value security irrespective of risk.
C)low unsystematic risk and high systematic risk respectively.
D)moderate systematic risk and zero systematic risk respectively.
E)None of the above.

Accepted Answer

Growth stocks typically have higher P/E ratios relative to the overall market, as investors are willing to pay more for the potential future growth of these companies. Value stocks, on the other hand, tend to have lower P/E ratios due to their perceived undervaluation in the market.

Question 10

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:
A)0.00
B)0.50
C)0.75
D)1.00
E)1.50

Accepted Answer

2/3(1.5)+ 1/3(0)= 1.0 + 0 = 1.0

Question 11

The systematic response coefficient for productivity,$\beta$_p,would produce an unexpected change in any security return of __ $\beta$_Pif the expected rate of productivity was 1.5% and the actual rate was 2.25%. A)0.75% B)-0.75% C)2.25% D)-2.25% E)1.5%

Accepted Answer

Ri = $\beta$PFP = $\beta$P(2.25 - 1.5)= 0.75 $\beta$P

Question 12

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

Accepted Answer

The answer of To estimate the cost of equity capital...

Question 13

Suppose the JumpStart Corporation's common stock has a beta of 0.8.If the risk-free rate is 4% and the expected market return is 9%,the expected return for JumpStart's common stock is:
A)3.2%.
B)4.0%.
C)7.2%.
D)8.0%.
E)9.0%.

Accepted Answer

4 + 0.8(9 - 4)= 8.0%

Question 14

Style portfolios are characterized by:
A)their stock attributes;P/Es less than the market P/E are value funds.
B)their systematic factors,higher systematic factors are benchmark portfolios.
C)their stock attributes;higher stock attribute factors are benchmark portfolios.
D)their systematic factors,P/Es greater than the market are value portfolios.
E)There is no difference between systematic factors and stock attributes.

Accepted Answer

The answer of Style portfolios are characterized by:
A)their stock attributes;P/Es...

Question 15

Parametric or empirical models rely on:
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)None of the above

Accepted Answer

Parametric or empirical models rely on finding regularities and relations in past market data, making choice B the correct answer. The other choices are not accurate descriptions of what these models rely on.

Question 16

A criticism of the CAPM is that it:
A)ignores the return on the market portfolio.
B)ignores the risk-free return.
C)requires a single measure of systematic risk.
D)utilizes too many factors.
E)None of the above.

Accepted Answer

The CAPM assumes that there is only one measure of systematic risk, beta, which is derived purely from market movements. This assumption ignores other sources of systematic risk and potential differences in risk among assets with the same beta.

Question 17

Calculate the stock's total return if the company announces that an important patent filing has been granted sooner than expected and will earn the company 5% more in return.
A)7.95%
B)9.95%
C)11.55%
D)7.90%
E)9.35%

Accepted Answer

R = 4.95% + 5% = 9.95%.

Question 18

Suppose the Carz Corporation's common stock has a beta of 0.9.If the risk-free rate is 3.5% and the expected market return is 9%,the expected return for JumpStart's common stock is:
A)3.5%.
B)8.45%.
C)9.00%.
D)9.15%.
E)9.24%.

Accepted Answer

3.5% + 0.9(9% - 3.5%)= 8.45%

Question 19

What would the stock's total return be if the actual growth in each of the factors was equal to growth expected? Assume no unexpected news on the patent.
A)4%
B)5%
C)6%
D)7%
E)8%

Accepted Answer

R = 6%,or the expected return on the stock.

Question 20

If the expected return on the stock is 6%,and no unexpected news concerning the stock surfaces,calculate the stock's total return.
A)2.95%
B)4.95%
C)6.55%
D)7.40%
E)8.85%

Accepted Answer

R = 6% + 1.8(.01 - -.01)+ 0.7(-.02 - .025%)+ 1(.02 - .035%)+ 0 = .0495

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

A value company is defined as one that:

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

The Fama-French three factor model includes the following factors:

The Fama-French three factor model predicts the expected return on a portfolio increases:

Calculate the stock's total return if the company announces that they had an industrial accident and the operating facilities will close down for some time thus resulting in a loss by the company of 7% in return.

Assume that the single factor APT model applies and a portfolio exists such that 1/2 of the funds are invested in Security Q and the rest in the risk-free asset.Security Q has a beta of 1.8.The portfolio has a beta of:

Suppose the MiniCD Corporation's common stock has a return of 12%.Assume the risk-free rate is 4%,the expected market return is 9%,and no unsystematic influence affected Mini's return.The beta for MiniCD is:

Three factors likely to occur in the APT model are:

A growth stock portfolio and a value portfolio might be characterized:

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:

The systematic response coefficient for productivity, $\beta$ _p,would produce an unexpected change in any security return of __ $\beta$ _Pif the expected rate of productivity was 1.5% and the actual rate was 2.25%.

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

Suppose the JumpStart Corporation's common stock has a beta of 0.8.If the risk-free rate is 4% and the expected market return is 9%,the expected return for JumpStart's common stock is:

Style portfolios are characterized by:

Parametric or empirical models rely on:

A criticism of the CAPM is that it:

Calculate the stock's total return if the company announces that an important patent filing has been granted sooner than expected and will earn the company 5% more in return.

Suppose the Carz Corporation's common stock has a beta of 0.9.If the risk-free rate is 3.5% and the expected market return is 9%,the expected return for JumpStart's common stock is:

What would the stock's total return be if the actual growth in each of the factors was equal to growth expected? Assume no unexpected news on the patent.

If the expected return on the stock is 6%,and no unexpected news concerning the stock surfaces,calculate the stock's total return.