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Exam 7: Capital Asset Pricing and Arbitrage Pricing Theory

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Question 1

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The expected return on the market is the risk free rate plus the _____________.

A) diversified returns
B) equilibrium risk premium
C) historical market return
D) unsystematic return

E) B) and C)
F) A) and C)

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Question 2

Multiple Choice

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According to capital asset pricing theory,the key determinant of portfolio returns is _________.

A) the degree of diversification
B) the systematic risk of the portfolio
C) the firm specific risk of the portfolio
D) economic factors

E) A) and D)
F) C) and D)

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Question 3

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According to the capital asset pricing model,_________.

Consider the capital asset pricing model.The market degree of risk aversion,A,is 3.The variance of return on the market portfolio is .0225.If the risk-free rate of return is 4%,the expected return on the market portfolio is _________.

Fama and French claim that after controlling for firm size and the ratio of firm's book value to market value,beta is ______________. I.highly significant in predicting future stock returns II.relatively useless in predicting future stock returns III.a good predictor of firm's specific risk

The market portfolio has a beta of _________.

Liquidity is a risk factor that __________.

Consider the one-factor APT.The variance of the return on the factor portfolio is .08.The beta of a well-diversified portfolio on the factor is 1.2.The variance of the return on the well-diversified portfolio is approximately _________.

You consider buying a share of stock at a price of $25.The stock is expected to pay a dividend of $1.50 next year and your advisory service tells you that you can expect to sell the stock in one year for $28.The stock's beta is 1.1,rf is 6% and E[rm] = 16%.What is the stock's abnormal return?

Research has identified two systematic factors that affect U.S.stock returns.The factors are growth in industrial production and changes in long term interest rates.Industrial production growth is expected to be 3% and long term interest rates are expected to increase by 1%.You are analyzing a stock is that has a beta of 1.2 on the industrial production factor and 0.5 on the interest rate factor.It currently has an expected return of 12%.However,if industrial production actually grows 5% and interest rates drop 2% what is your best guess of the stock's return?

According to the CAPM,what is the expected market return given an expected return on a security of 15.8%,a stock beta of 1.2,and a risk free interest rate of 5.0%?

The SML is valid for _______________ and the CML is valid for ______________.

Beta is a measure of ______________.

Security X has an expected rate of return of 13% and a beta of 1.15.The risk-free rate is 5% and the market expected rate of return is 15%.According to the capital asset pricing model,security X is _________.

What is the expected return on the market?

Empirical results estimated from historical data indicate that betas _________.

According to the CAPM,the risk premium an investor expects to receive on any stock or portfolio is _______________.

A stock's alpha measures the stock's ____________________.

Arbitrage is __________________________.

When all investors analyze securities in the same way and share the same economic view of the world we say they have ____________________.