Question 1

Assume that both X and Y are well-diversified portfolios and the risk-free rate is 8%.Portfolio X has an expected return of 14% and a beta of 1.00.Portfolio Y has an expected return of 9.5% and a beta of 0.25.In this situation,you would conclude that portfolios X and Y _________.

Accepted Answer

A)   are in equilibrium
B)   offer an arbitrage opportunity
C)   are both underpriced
D)   are both fairly pricedE) B) and C)
F) B) and D)

Question 2

Consider the CAPM.The risk-free rate is 5% and the expected return on the market is 15%.What is the beta on a stock with an expected return of 17%?

Accepted Answer

A)   .5
B)   .7
C)   1
D)   1.2E) B) and C)
F) A) and B)

Question 3

The beta of a security is equal to _________.

Accepted Answer

A)   the covariance between the security and market returns divided by the variance of the market's returns
B)   the covariance between the security and market returns divided by the standard deviation of the market's returns
C)   the variance of the security's returns divided by the covariance between the security and market returns
D)   the variance of the security's returns divided by the variance of the market's returnsE) B) and D)
F) B) and C)

Question 4

The possibility of arbitrage arises when ____________.

Accepted Answer

A)   there is no consensus among investors regarding the future direction of the market, and thus trades are made arbitrarily
B)   mis-pricing among securities creates opportunities for riskless profits
C)   two identically risky securities carry the same expected returns
D)   investors do not diversifyE) B) and C)
F) C) and D)

Question 5

One of the main problems with the arbitrage pricing theory is __________.

Accepted Answer

A)   its use of several factors instead of a single market index to explain the risk-return relationship
B)   the introduction of non-systematic risk as a key factor in the risk-return relationship
C)   that the APT requires an even larger number of unrealistic assumptions than the CAPM
D)   the model fails to identify the key macroeconomic variables in the risk-return relationshipE) B) and D)
F) B) and C)

Question 6

Consider the single factor APT.Portfolio A has a beta of 1.3 and an expected return of 21%.Portfolio B has a beta of 0.7 and an expected return of 17%.The risk-free rate of return is 8%.If you wanted to take advantage of an arbitrage opportunity,you should take a short position in portfolio __________ and a long position in portfolio _________.

Accepted Answer

A)   A, A
B)   A, B
C)   B, A
D)   B, BE) A) and D)
F) All of the above

Question 7

The most significant conceptual difference between the arbitrage pricing theory (APT) and the capital asset pricing model (CAPM) is that the CAPM _____________.

Accepted Answer

A)   places less emphasis on market risk
B)   recognizes multiple unsystematic risk factors
C)   recognizes only one systematic risk factor
D)   recognizes multiple systematic risk factorsE) A) and D)
F) A) and C)

Question 8

Consider the CAPM.The risk-free rate is 6% and the expected return on the market is 18%.What is the expected return on a stock with a beta of 1.3?

Accepted Answer

A)   6%
B)   15.6%
C)   18%
D)   21.6%E) All of the above
F) C) and D)

Question 9

You run a regression of a stock's returns versus a market index and find the following:  Based on the data you know that the stock

Accepted Answer

A)   earned a positive alpha that is statistically significantly different from zero
B)   has a beta precisely equal to 0.890
C)   has a beta that could be anything between 0.6541 and 1.465 inclusive
D)   has no systematic riskE) A) and C)
F) None of the above

Question 10

Standard deviation of portfolio returns is a measure of ___________.

Accepted Answer

A)   total risk
B)   relative systematic risk
C)   relative non-systematic risk
D)   relative business riskE) B) and D)
F) B) and C)

Question 11

According to the capital asset pricing model,a security with a _________.

Accepted Answer

A)   negative alpha is considered a good buy
B)   positive alpha is considered overpriced
C)   positive alpha is considered underpriced
D)   zero alpha is considered a good buyE) C) and D)
F) None of the above

Question 12

The risk premium for exposure to exchange rates is 5% and the firm has a beta relative to exchanges rates of 0.4.The risk premium for exposure to the consumer price index is -6% and the firm has a beta relative to the CPI of 0.8.If the risk free rate is 3.0%,what is the expected return on this stock?

Accepted Answer

A)   0.2%
B)   1.5%
C)   3.6%
D)   4.0%E) None of the above
F) All of the above

Question 13

The expected return on the market portfolio is 15%.The risk-free rate is 8%.The expected return on SDA Corp.common stock is 16%.The beta of SDA Corp.common stock is 1.25.Within the context of the capital asset pricing model,_________.

Accepted Answer

A)   SDA Corp. stock is underpriced
B)   SDA Corp. stock is fairly priced
C)   SDA Corp. stock's alpha is -0.75%
D)   SDA Corp. stock alpha is 0.75%E) B) and C)
F) A) and B)

Question 14

The arbitrage pricing theory was developed by _________.

Accepted Answer

A)   Henry Markowitz
B)   Stephen Ross
C)   William Sharpe
D)   Eugene FamaE) B) and C)
F) A) and C)

Question 15

The risk-free rate is 4%.The expected market rate of return is 11%.If you expect stock X with a beta of .8 to offer a rate of return of 12 percent,then you should _________.

Accepted Answer

A)   buy stock X because it is overpriced
B)   buy stock X because it is underpriced
C)   sell short stock X because it is overpriced
D)   sell short stock X because it is underpricedE) A) and B)
F) None of the above

Question 16

Arbitrage is based on the idea that _________.

Accepted Answer

A)   assets with identical risks must have the same expected rate of return
B)   securities with similar risk should sell at different prices
C)   the expected returns from equally risky assets are different
D)   markets are perfectly efficientE) All of the above
F) B) and D)

Question 17

If all investors become more risk averse the SML will _______________ and stock prices will _______________.

Accepted Answer

A)   shift upward; rise
B)   shift downward; fall
C)   have the same intercept with a steeper slope; fall
D)   have the same intercept with a flatter slope; riseE) A) and C)
F) All of the above

Question 18

According to the CAPM which of the following is not a true statement regarding the market portfolio.

Accepted Answer

A)   All securities in the market portfolio are held in proportion to their market values
B)   It includes all risky assets in the world, including human capital
C)   It is always the minimum variance portfolio on the efficient frontier
D)   It lies on the efficient frontierE) B) and C)
F) All of the above

Question 19

In a simple CAPM world which of the following statements is/are correct?
I.All investors will choose to hold the market portfolio,which includes all risky assets in the world
II.Investors' complete portfolio will vary depending on their risk aversion
III.The return per unit of risk will be identical for all individual assets
IV.The market portfolio will be on the efficient frontier and it will be the optimal risky portfolio

Accepted Answer

A)   I, II and III only
B)   II, III and IV only
C)   I, III and IV only
D)   I, II, III and IVE) A) and C)
F) C) and D)

Question 20

You invest $600 in security A with a beta of 1.5 and $400 in security B with a beta of .90.The beta of this portfolio is _________.

Accepted Answer

A)   1.14
B)   1.20
C)   1.26
D)   1.50E) All of the above
F) B) and D)

Exam 7: Capital Asset Pricing and Arbitrage Pricing Theory

Assume that both X and Y are well-diversified portfolios and the risk-free rate is 8%.Portfolio X has an expected return of 14% and a beta of 1.00.Portfolio Y has an expected return of 9.5% and a beta of 0.25.In this situation,you would conclude that portfolios X and Y _________.

Correct Answer
verified

Correct Answer
verified

One of the main problems with the arbitrage pricing theory is __________.

Correct Answer
verified

The risk-free rate is 4%.The expected market rate of return is 11%.If you expect stock X with a beta of .8 to offer a rate of return of 12 percent,then you should _________.

Correct Answer
verified

Consider the CAPM.The risk-free rate is 6% and the expected return on the market is 18%.What is the expected return on a stock with a beta of 1.3?

Correct Answer
verified

You run a regression of a stock's returns versus a market index and find the following: Based on the data you know that the stock

Correct Answer
verified

Correct Answer
verified

The arbitrage pricing theory was developed by _________.

Correct Answer
verified

The possibility of arbitrage arises when ____________.

Correct Answer
verified

Standard deviation of portfolio returns is a measure of ___________.

Correct Answer
verified

Arbitrage is based on the idea that _________.

Correct Answer
verified

According to the CAPM which of the following is not a true statement regarding the market portfolio.

Correct Answer
verified

Consider the CAPM.The risk-free rate is 5% and the expected return on the market is 15%.What is the beta on a stock with an expected return of 17%?

Correct Answer
verified

The expected return on the market portfolio is 15%.The risk-free rate is 8%.The expected return on SDA Corp.common stock is 16%.The beta of SDA Corp.common stock is 1.25.Within the context of the capital asset pricing model,_________.

Correct Answer
verified

The beta of a security is equal to _________.

Correct Answer
verified

Correct Answer
verified

You invest $600 in security A with a beta of 1.5 and $400 in security B with a beta of .90.The beta of this portfolio is _________.

Correct Answer
verified

If all investors become more risk averse the SML will _ and stock prices will _.

Correct Answer
verified

The most significant conceptual difference between the arbitrage pricing theory (APT) and the capital asset pricing model (CAPM) is that the CAPM _____________.

Correct Answer
verified

According to the capital asset pricing model,a security with a _________.

Correct Answer
verified

Exam 7: Capital Asset Pricing and Arbitrage Pricing Theory

Assume that both X and Y are well-diversified portfolios and the risk-free rate is 8%.Portfolio X has an expected return of 14% and a beta of 1.00.Portfolio Y has an expected return of 9.5% and a beta of 0.25.In this situation,you would conclude that portfolios X and Y _________.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

One of the main problems with the arbitrage pricing theory is __________.

Correct AnswerverifiedShow Answer

The risk-free rate is 4%.The expected market rate of return is 11%.If you expect stock X with a beta of .8 to offer a rate of return of 12 percent,then you should _________.

Correct AnswerverifiedShow Answer

Consider the CAPM.The risk-free rate is 6% and the expected return on the market is 18%.What is the expected return on a stock with a beta of 1.3?

Correct AnswerverifiedShow Answer

You run a regression of a stock's returns versus a market index and find the following: Based on the data you know that the stock

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The arbitrage pricing theory was developed by _________.

Correct AnswerverifiedShow Answer

The possibility of arbitrage arises when ____________.

Correct AnswerverifiedShow Answer

Standard deviation of portfolio returns is a measure of ___________.

Correct AnswerverifiedShow Answer

Arbitrage is based on the idea that _________.

Correct AnswerverifiedShow Answer

According to the CAPM which of the following is not a true statement regarding the market portfolio.

Correct AnswerverifiedShow Answer

Consider the CAPM.The risk-free rate is 5% and the expected return on the market is 15%.What is the beta on a stock with an expected return of 17%?

Correct AnswerverifiedShow Answer

The expected return on the market portfolio is 15%.The risk-free rate is 8%.The expected return on SDA Corp.common stock is 16%.The beta of SDA Corp.common stock is 1.25.Within the context of the capital asset pricing model,_________.

Correct AnswerverifiedShow Answer

The beta of a security is equal to _________.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

You invest $600 in security A with a beta of 1.5 and $400 in security B with a beta of .90.The beta of this portfolio is _________.

Correct AnswerverifiedShow Answer

If all investors become more risk averse the SML will _______________ and stock prices will _______________.

Correct AnswerverifiedShow Answer

The most significant conceptual difference between the arbitrage pricing theory (APT) and the capital asset pricing model (CAPM) is that the CAPM _____________.

Correct AnswerverifiedShow Answer

According to the capital asset pricing model,a security with a _________.

Correct AnswerverifiedShow Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

If all investors become more risk averse the SML will _ and stock prices will _.

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified