Question 1

Some common characteristics of the relevant factors of APT models include all of the following EXCEPT

Accepted Answer

A)   broad economic variables
B)   the price of gold
C)   the term structure of interest rates
D)   corporate earnings and dividendsE) None of the above
F) All of the above

Question 2

APT assumes that an arbitrage portfolio's nonfactor risk is

Accepted Answer

A)   -1.
B)   +.5.
C)   0.
D)   -.5.E) C) and D)
F) None of the above

Question 3

____ is the process of earning risk less profits by taking advantage of differential pricing for the same physical asset or security.

Accepted Answer

A)   Anomalies
B)   Aggregation
C)   Abstraction
D)   ArbitrageE) A) and B)
F) A) and C)

Question 4

The APT approach assumes stock returns are related to the factors of

Accepted Answer

A)   market returns only.
B)   market returns and GDP.
C)   GDP and CPI.
D)   no specific variable.E) B) and D)
F) A) and B)

Question 5

Suppose in a single factor APT model,  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 is 10%.  If an investor wanted to take advantage of an arbitrage opportunity, he or she would take a short position in portfolio _____ and a long position in portfolio  _____.

Accepted Answer

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

Question 6

In a single-factor APT model, the variance of returns on the factor portfolio is 9%, and the beta of a well-diversified portfolio on the factor is 1.2.  What is the variance of return on the well-diversified portfolio?

Accepted Answer

A)   3.60
B)   10.80
C)   12.96
D)   14.06E) A) and B)
F) A) and C)

Question 7

In a two-factor model, each security will have _____ sensitivity coefficients.

Accepted Answer

A)   two
B)   one
C)   none
D)   manyE) None of the above
F) All of the above

Question 8

Which one of the following is NOT an accurate statement about why an investor would want to form an arbitrage portfolio? APT portfolios

Accepted Answer

A)   provide an opportunity to increase expected returns without increasing risk
B)   are attractive to risk-averse investors
C)   require risk free borrowing to be financed
D)   are self-financingE) B) and D)
F) B) and C)

Question 9

A similarity between APT and CAPM is that both

Accepted Answer

A)   assume security sensitivities are explained by beta.
B)   assumes investors want the largest return for a given level of risk.
C)   make the same assumption about riskfree lending rates.
D)   use the covariance between a security and the market.E) A) and C)
F) All of the above

Question 10

An analyst develops her APT asset pricing line and finds that Securities A and B both have the same factor sensitivity. A lies above the line; B lies below the line. She should

Accepted Answer

A)   buy B and sell an equal amount of A.
B)   sell B and hold A.
C)   buy A and sell an equal amount of B.
D)   buy A and hold B.E) A) and D)
F) All of the above

Question 11

Provided a proxy for the market portfolio could be found, then the CAPM and the APT would ________.

Accepted Answer

A)   contradict each other in their assumptions
B)   prove inconsistent
C)   prove somewhat consistent
D)   demonstrate perfect consistencyE) A) and B)
F) A) and C)

Question 12

To solve an arbitrage portfolio with five securities and five factors, an analyst would have the following number of formulas

Accepted Answer

A)   4.
B)   3.
C)   5.
D)   0E) B) and C)
F) All of the above

Question 13

Consider a one-factor APT model where the standard deviation of the return on a well-diversified portfolio is 20%.  The standard deviation on the factor portfolio is 16%.  The beta of the well-diversified portfolio is approximately

Accepted Answer

A)   .75
B)   1.0
C)   1.35
D)   1.25E) A) and B)
F) A) and C)

Question 14

Which one of the following is not a significant difference between the APT and the CAPM model?

Accepted Answer

A)   APT is a much less restrictive asset pricing model
B)   CAPM is an equilibrium model while the APT is not
C)   The APT has weaker assumptions about investor preferences
D)   APT assumes returns are generated by a factor model while the CAPM makes no reference to the underlying return generating processE) B) and D)
F) A) and D)

Question 15

In a multiple-factor situation, the asset pricing line

Accepted Answer

A)   becomes curved with a decreasing, positive slope.
B)   contradicts the CAPM.
C)   is still linear.
D)   becomes flat.E) A) and D)
F) None of the above

Question 16

_______ risk is the portion of a security's total risk that is not related to moves in various common factors.

Accepted Answer

A)   non-market
B)   factor
C)   nominal
D)   idiosyncraticE) A) and D)
F) None of the above

Question 17

An investor seeks to explore the possibility of forming an arbitrage portfolio in order to increase

Accepted Answer

A)   the expected return without increasing risk
B)   the expected return with increasing risk
C)   the expected return
D)   the expected riskE) C) and D)
F) A) and B)

Question 18

The assumptions found in the APT appear __________ the assumptions of the CAPM.

Accepted Answer

A)   similar to
B)   different than
C)   relatively consistent with
D)   slightly different thanE) B) and D)
F) A) and D)

Question 19

Which one of the following is NOT a condition which defines an arbitrage portfolio?

Accepted Answer

A)   It is self-financing and requires no additional funds from the investor.
B)   It is riskless and has no sensitivity to any factor.
C)   It has a positive expected return.
D)   It's beta defines the factor risk.E) A) and D)
F) A) and C)

Question 20

Suppose in a single factor APT model, portfolio A has a beta of 1.3 and expected returns of 21%.  Portfolio B has a beta of 0.7 and returns of 17%.  The risk free rate 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 _____.

Accepted Answer

A)   A, A
B)   A, B
C)   B, A
D)   B, BE) B) and C)
F) None of the above

Exam 12: Arbitrage Pricing Theory

Correct Answer
verified

The APT approach assumes stock returns are related to the factors of

Correct Answer
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Which one of the following is NOT a condition which defines an arbitrage portfolio?

Correct Answer
verified

In a multiple-factor situation, the asset pricing line

Correct Answer
verified

An analyst develops her APT asset pricing line and finds that Securities A and B both have the same factor sensitivity. A lies above the line; B lies below the line. She should

Correct Answer
verified

Consider a one-factor APT model where the standard deviation of the return on a well-diversified portfolio is 20%. The standard deviation on the factor portfolio is 16%. The beta of the well-diversified portfolio is approximately

Correct Answer
verified

In a single-factor APT model, the variance of returns on the factor portfolio is 9%, and the beta of a well-diversified portfolio on the factor is 1.2. What is the variance of return on the well-diversified portfolio?

Correct Answer
verified

Which one of the following is NOT an accurate statement about why an investor would want to form an arbitrage portfolio? APT portfolios

Correct Answer
verified

____ is the process of earning risk less profits by taking advantage of differential pricing for the same physical asset or security.

Correct Answer
verified

To solve an arbitrage portfolio with five securities and five factors, an analyst would have the following number of formulas

Correct Answer
verified

An investor seeks to explore the possibility of forming an arbitrage portfolio in order to increase

Correct Answer
verified

The assumptions found in the APT appear __________ the assumptions of the CAPM.

Correct Answer
verified

_______ risk is the portion of a security's total risk that is not related to moves in various common factors.

Correct Answer
verified

Some common characteristics of the relevant factors of APT models include all of the following EXCEPT

Correct Answer
verified

Correct Answer
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In a two-factor model, each security will have _____ sensitivity coefficients.

Correct Answer
verified

APT assumes that an arbitrage portfolio's nonfactor risk is

Correct Answer
verified

A similarity between APT and CAPM is that both

Correct Answer
verified

Which one of the following is not a significant difference between the APT and the CAPM model?

Correct Answer
verified

Provided a proxy for the market portfolio could be found, then the CAPM and the APT would ________.

Correct Answer
verified

Exam 12: Arbitrage Pricing Theory

Correct AnswerverifiedShow Answer

The APT approach assumes stock returns are related to the factors of

Correct AnswerverifiedShow Answer

Which one of the following is NOT a condition which defines an arbitrage portfolio?

Correct AnswerverifiedShow Answer

In a multiple-factor situation, the asset pricing line

Correct AnswerverifiedShow Answer

An analyst develops her APT asset pricing line and finds that Securities A and B both have the same factor sensitivity. A lies above the line; B lies below the line. She should

Correct AnswerverifiedShow Answer

Consider a one-factor APT model where the standard deviation of the return on a well-diversified portfolio is 20%. The standard deviation on the factor portfolio is 16%. The beta of the well-diversified portfolio is approximately

Correct AnswerverifiedShow Answer

In a single-factor APT model, the variance of returns on the factor portfolio is 9%, and the beta of a well-diversified portfolio on the factor is 1.2. What is the variance of return on the well-diversified portfolio?

Correct AnswerverifiedShow Answer

Which one of the following is NOT an accurate statement about why an investor would want to form an arbitrage portfolio? APT portfolios

Correct AnswerverifiedShow Answer

____ is the process of earning risk less profits by taking advantage of differential pricing for the same physical asset or security.

Correct AnswerverifiedShow Answer

To solve an arbitrage portfolio with five securities and five factors, an analyst would have the following number of formulas

Correct AnswerverifiedShow Answer

An investor seeks to explore the possibility of forming an arbitrage portfolio in order to increase

Correct AnswerverifiedShow Answer

The assumptions found in the APT appear __________ the assumptions of the CAPM.

Correct AnswerverifiedShow Answer

_______ risk is the portion of a security's total risk that is not related to moves in various common factors.

Correct AnswerverifiedShow Answer

Some common characteristics of the relevant factors of APT models include all of the following EXCEPT

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

In a two-factor model, each security will have _____ sensitivity coefficients.

Correct AnswerverifiedShow Answer

APT assumes that an arbitrage portfolio's nonfactor risk is

Correct AnswerverifiedShow Answer

A similarity between APT and CAPM is that both

Correct AnswerverifiedShow Answer

Which one of the following is not a significant difference between the APT and the CAPM model?

Correct AnswerverifiedShow Answer

Provided a proxy for the market portfolio could be found, then the CAPM and the APT would ________.

Correct AnswerverifiedShow Answer

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