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Exam 7: Capital Pricing and Arbitrage Pricing Theory

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Question 1

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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.

A) 13.5%
B) 15.0%
C) 16.25%
D) 23.0%

E) A) and D)
F) None of the above

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Question 2

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If all investors become more risk averse the SML will ________ and share prices will ________.

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; rise

E) C) and D)
F) B) and C)

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Question 3

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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?

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 share?

There are two independent economic factors M1 and M2. The risk-free rate is 5% and all shares have independent firm-specific components with a standard deviation of 25%. Portfolios A and B are well diversified. Given the data below which equation provides the correct pricing model?

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 ________.

Which of the following are assumptions of the simple CAPM model? I. Individual trades of investors do not affect a share's price II. All investors plan for one identical holding period III. All investors analyse securities in the same way and share the same economic view of the world IV. All investors have the same level of risk aversion

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

The arbitrage pricing theory was developed by ________.

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

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

The two factor model on a share 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 share?

In a well-diversified portfolio, ________ risk is negligible.

A share has a beta of 1.3. The unsystematic risk of this share is ________ the stock market as a whole.

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 ________.

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

The possibility of arbitrage arises when ________.

The two factor model on a share provides a risk premium for exposure to market risk of 12%, a risk premium for exposure to silver commodity prices of 3.5% and a risk-free rate of 4.0%. What is the expected return on the share?

Consider the single factor APT. Portfolio A has a beta of 0.2 and an expected return of 13%. Portfolio B has a beta of 0.4 and an expected return of 15%. The risk-free rate of return is 10%. If you wanted to take advantage of an arbitrage opportunity, you should take a short position in portfolio ________ and a long position in portfolio ________.

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