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Exam 7: Capital Asset Pricing and Arbitrage Pricing Theory

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Question 41

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Using the index model,the alpha of a stock is 3.0%,the beta if 1.1 and the market return is 10%.What is the residual given an actual return of 15%?

A) 0.0%
B) 1.0%
C) 2.0%
D) 3.0%

E) All of the above
F) C) and D)

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Question 42

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According to the capital asset pricing model,a fairly priced security will plot _________.

A) above the security market line
B) along the security market line
C) below the security market line
D) at no relation to the security market line

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

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Question 43

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Building a zero-investment portfolio will always involve _____________.

In a well diversified portfolio,__________ risk is negligible.

Consider the multi-factor APT with two factors.Portfolio A has a beta of 0.5 on factor 1 and a beta of 1.25 on factor 2.The risk premiums on the factors 1 and 2 portfolios are 1% and 7% respectively.The risk-free rate of return is 7%.The expected return on portfolio A is __________ if no arbitrage opportunities exist.

An important characteristic of market equilibrium is _______________.

If the beta of the market index is 1.0 and the standard deviation of the market index increases from 12% to 18%,what is the new beta of the market index?

According to the capital asset pricing model,fairly priced securities have _________.

You have a $50,000 portfolio consisting of Intel,GE and Con Edison.You put $20,000 in Intel,$12,000 in GE and the rest in Con Edison.Intel,GE and Con Edison have betas of 1.3,1.0 and 0.8 respectively.What is your portfolio beta?

The two factor model on a stock provides a risk premium for exposure to market risk of 9%,a risk premium for exposure to interest rate of (-1.3%) ,and a risk free rate of 3.5%.What is the expected return on the stock?

The measure of risk used in the Capital Asset Pricing Model is ___________.

What is the expected return for a portfolio with a beta of 0.5?

Consider the CAPM.The expected return on the market is 18%.The expected return on a stock with a beta of 1.2 is 20%.What is the risk-free rate?

In a study conducted by Jagannathan and Wang,it was found that the performance of beta in explaining security returns could be considerably enhanced by _____________. I.including the unsystematic risk of a stock II.including human capital in the market portfolio III.allowing for changes in beta over time

The risk premium for exposure to aluminum commodity prices is 4% and the firm has a beta relative to aluminum commodity prices of 0.6.The risk premium for exposure to GDP changes is 6% and the firm has a beta relative to GDP of 1.2.If the risk free rate is 4.0%,what is the expected return on this stock?

In a world where the CAPM holds which one of the following is not a true statement regarding the capital market line?

The variance of the return on the market portfolio is .0400 and the expected return on the market portfolio is 20%.If the risk-free rate of return is 10%,the market degree of risk aversion,A,is _________.

What is the beta for a portfolio with an expected return of 12.5%?

Two investment advisors are comparing performance.Advisor A averaged a 20% return with a portfolio beta of 1.5 and Advisor B averaged a 15% return with a portfolio beta of 1.2.If the T-bill rate was 5% and the market return during the period was 13%,which advisor was the better stock picker?

If enough investors decide to purchase stocks they are likely to drive up stock prices thereby causing _____________ and ___________.