INVESTMENT8THTESTBANKCHAP10

1、multiple choice questions1. _ a relationship between expected return and risk. a) apt stipulates b) capm stipulates c) both capm and apt stipulate d) neither capm nor apt stipulate e) no pricing model has found answer: c difficulty: easy rationale: both models attempt to explain asset pricing based

2、on risk/return relationships. 2. which pricing model provides no guidance concerning the determination of the risk premium on factor portfolios? a) the capm b) the multifactor apt c) both the capm and the multifactor apt d) neither the capm nor the multifactor apt e) none of the above is a true stat

3、ement. answer: b difficulty: moderate rationale: the multifactor apt provides no guidance as to the determination of the risk premium on the various factors. the capm assumes that the excess market return over the risk-free rate is the market premium in the single factor capm. 3. an arbitrage opport

4、unity exists if an investor can construct a _ investment portfolio that will yield a sure profit. a) positive b) negative c) zero d) all of the above e) none of the above answer: c difficulty: easy rationale: if the investor can construct a portfolio without the use of the investors own funds and th

5、e portfolio yields a positive profit, arbitrage opportunities exist. 4. the apt was developed in 1976 by _. a) lintner b) modigliani and miller c) ross d) sharpe e) none of the above answer: c difficulty: easy rationale: ross developed this model in 1976. 5. a _ portfolio is a well-diversified portf

6、olio constructed to have a beta of 1 on one of the factors and a beta of 0 on any other factor. a) factor b) market c) index d) a and b e) a, b, and c answer: a difficulty: easy rationale: a factor model portfolio has a beta of 1 one factor, with zero betas on other factors. 6. the exploitation of s

7、ecurity mispricing in such a way that risk-free economic profits may be earned is called _. a) arbitrage b) capital asset pricing c) factoring d) fundamental analysis e) none of the above answer: a difficulty: easy rationale: arbitrage is earning of positive profits with a zero (risk-free) investmen

8、t. 7. in developing the apt, ross assumed that uncertainty in asset returns was a result of a) a common macroeconomic factor b) firm-specific factors c) pricing error d) neither a nor b e) both a and b answer: e difficulty: moderate rationale: total risk (uncertainty) is assumed to be composed of bo

9、th macroeconomic and firm-specific factors. 8. the _ provides an unequivocal statement on the expected return-beta relationship for all assets, whereas the _ implies that this relationship holds for all but perhaps a small number of securities. a) apt, capm b) apt, opm c) capm, apt d) capm, opm e) n

10、one of the above answer: c difficulty: moderate rationale: the capm is an asset-pricing model based on the risk/return relationship of all assets. the apt implies that this relationship holds for all well-diversified portfolios, and for all but perhaps a few individual securities. 9. consider a sing

11、le factor apt. portfolio a has a beta of and an expected return of 16%. portfolio b has a beta of and an expected return of 12%. the risk-free rate of return is 6%. if you wanted to take advantage of an arbitrage opportunity, you should take a short position in portfolio _ and a long position in por

12、tfolio _. a) a, a b) a, b c) b, a d) b, b e) a, the riskless asset answer: c difficulty: moderate rationale: a: 16% = + 6%; f = 10%; b: 12% = + 6%: f = %; thus, short b and take a long position in a. 10. consider the single factor apt. portfolio a has a beta of and an expected return of 13%. portfol

13、io b has a beta of 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 _. a) a, a b) a, b c) b, a d) b, b e) none of the above answer: c diffi

14、culty: moderate rationale: a: 13% = 10% + ; f = 15%; b: 15% = 10% + ; f = %; therefore, short b and take a long position in a. 11. consider the one-factor apt. the variance of returns on the factor portfolio is 6%. the beta of a well-diversified portfolio on the factor is . the variance of returns o

15、n the well-diversified portfolio is approximately _. a) % b) % c) % d) % e) none of the above answer: c difficulty: moderate rationale: s2p = 2(6%) = %. 12. consider the one-factor apt. the standard deviation of returns on a well-diversified portfolio is 18%. the standard deviation on the factor por

16、tfolio is 16%. the beta of the well-diversified portfolio is approximately _. a) b) c) d) e) none of the above answer: b difficulty: moderate rationale: (18%)2 = (16%)2 b2; b = . 13. consider the single-factor apt. stocks a and b have expected returns of 15% and 18%, respectively. the risk-free rate

17、 of return is 6%. stock b has a beta of . if arbitrage opportunities are ruled out, stock a has a beta of _. a) b) c) d) e) none of the above answer: e difficulty: moderate rationale: a: 15% = 6% + bf; b: 8% = 6% + ; f = 12%; thus, beta of a = 9/12 = . 14. consider the multifactor apt with two facto

18、rs. stock a has an expected return of %, a beta of on factor 1 and a beta of .8 on factor 2. the risk premium on the factor 1 portfolio is 3%. the risk-free rate of return is 6%. what is the risk-premium on factor 2 if no arbitrage opportunities exit? a) 2% b) 3% c) 4% d) % e) none of the above answ

19、er: d difficulty: difficult rationale: % = (3%) + .8x + 6%; x = . 15. consider the multifactor model apt with two factors. portfolio a has a beta of on factor 1 and a beta of on factor 2. the risk premiums on the factor 1 and factor 2 portfolios are 1% and 7%, respectively. the risk-free rate of ret

20、urn is 7%. the expected return on portfolio a is _if no arbitrage opportunities exist. a) % b) % c) % d) % e) none of the above answer: c difficulty: moderate rationale: 7% + (1%) + (7%) = %. 16. consider the multifactor apt with two factors. the risk premiums on the factor 1 and factor 2 portfolios

21、 are 5% and 6%, respectively. stock a has a beta of on factor 1, and a beta of on factor 2. the expected return on stock a is 17%. if no arbitrage opportunities exist, the risk-free rate of return is _. a) % b) % c) % d) % e) none of the above answer: c difficulty: moderate rationale: 17% = x% + (5%

22、) + (6%); x = %. 17. consider a one-factor economy. portfolio a has a beta of on the factor and portfolio b has a beta of on the factor. the expected returns on portfolios a and b are 11% and 17%, respectively. assume that the risk-free rate is 6% and that arbitrage opportunities exist. suppose you

23、invested $100,000 in the risk-free asset, $100,000 in portfolio b, and sold short $200,000 of portfolio a. your expected profit from this strategy would be _. a) -$1,000 b) $0 c) $1,000 d) $2,000 e) none of the above answer: c difficulty: moderate rationale: $100,000 = $6,000 (risk-free position); $

24、100,000 = $17,000 (portfolio b); -$200,000 = -$22,000 (short position, portfolio a); 1,000 profit. 18. consider the one-factor apt. assume that two portfolios, a and b, are well diversified. the betas of portfolios a and b are and , respectively. the expected returns on portfolios a and b are 19% an

25、d 24%, respectively. assuming no arbitrage opportunities exist, the risk-free rate of return must be _. a) % b) % c) % d) % e) none of the above answer: b difficulty: moderate rationale: a: 19% = rf + 1(f); b:24% = rf + (f); 5% = .5(f); f = 10%; 24% = rf + (10); ff = 9%. 19. consider the multifactor

26、 apt. the risk premiums on the factor 1 and factor 2 portfolios are 5% and 3%, respectively. the risk-free rate of return is 10%. stock a has an expected return of 19% and a beta on factor 1 of . stock a has a beta on factor 2 of _. a) b) c) d) e) none of the above answer: c difficulty: moderate rat

27、ionale: 19% = 10% + 5% + 3%(x); x = . 20. consider the single factor apt. portfolios a and b have expected returns of 14% and 18%, respectively. the risk-free rate of return is 7%. portfolio a has a beta of . if arbitrage opportunities are ruled out, portfolio b must have a beta of _. a) b) c) d) e)

28、 none of the above answer: c difficulty: moderate rationale: a: 14% = 7% + ; f = 10; b: 18% = 7% + 10b; b = . use the following to answer questions 21-24: there are three stocks, a, b, and c. you can either invest in these stocks or short sell them. there are three possible states of nature for econ

29、omic growth in the upcoming year; economic growth may be strong, moderate, or weak. the returns for the upcoming year on stocks a, b, and c for each of these states of nature are given below: 21. if you invested in an equally weighted portfolio of stocks a and b, your portfolio return would be _ if

30、economic growth were moderate. a) % b) % c) % d) % e) none of the above answer: d difficulty: easy rationale: e(rp) = (17%) + (15%) = 16%. 22. if you invested in an equally weighted portfolio of stocks a and c, your portfolio return would be _ if economic growth was strong. a) % b) % c) % d) % e) no

31、ne of the above answer: b difficulty: easy rationale: (39%) + (6%) = %. 23. if you invested in an equally weighted portfolio of stocks b and c, your portfolio return would be _ if economic growth was weak. a) % b) % c) % d) % e) none of the above answer: d difficulty: easy rationale: (0%) + (22%) =

32、11%. 24. if you wanted to take advantage of a risk-free arbitrage opportunity, you should take a short position in _ and a long position in an equally weighted portfolio of _. a) a, b and c b) b, a and c c) c, a and b d) a and b, c e) none of the above, none of the above answer: c difficulty: diffic

33、ult rationale: e(ra) = (39% + 17% - 5%)/3 = 17%; e(rb) = (30% + 15% + 0%)/3 = 15%; e(rc) = (22% + 14% + 6%)/3 = 14%; e(rp) = (14%) + (17% + 15%)/2; % + % = %. use the following to answer questions 25-26: consider the multifactor apt. there are two independent economic factors, f1 and f2. the risk-fr

34、ee rate of return is 6%. the following information is available about two well-diversified portfolios: 25. assuming no arbitrage opportunities exist, the risk premium on the factor f1 portfolio should be _. a) 3% b) 4% c) 5% d) 6% e) none of the above answer: a difficulty: difficult rationale: 2a: 3

35、8% = 12% + (rp1) + (rp2); b: 12% = 6% + (rp1) + (rp2); 26% = 6% + (rp2); rp2 = 5; a: 19% = 6% + rp1 + (5); rp1 = 3%. 26. assuming no arbitrage opportunities exist, the risk premium on the factor f2 portfolio should be _. a) 3% b) 4% c) 5% d) 6% e) none of the above answer: c difficulty: difficult ra

36、tionale: see solution to previous problem. 27. a zero-investment portfolio with a positive expected return arises when _. a) an investor has downside risk only b) the law of prices is not violated c) the opportunity set is not tangent to the capital allocation line d) a risk-free arbitrage opportuni

37、ty exists e) none of the above answer: d difficulty: easy rationale: when an investor can create a zero-investment portfolio (by using none of the investors own funds) with a possibility of a positive profit, a risk-free arbitrage opportunity exists. 28. an investor will take as large a position as

38、possible when an equilibrium price relationship is violated. this is an example of _. a) a dominance argument b) the mean-variance efficiency frontier c) a risk-free arbitrage d) the capital asset pricing model e) none of the above answer: c difficulty: moderate rationale: when the equilibrium price

39、 is violated, the investor will buy the lower priced asset and simultaneously place an order to sell the higher priced asset. such transactions result in risk-free arbitrage. the larger the positions, the greater the risk-free arbitrage profits. 29. the apt differs from the capm because the apt _. a

40、) places more emphasis on market risk b) minimizes the importance of diversification c) recognizes multiple unsystematic risk factors d) recognizes multiple systematic risk factors e) none of the above answer: d difficulty: moderate rationale: the capm assumes that market returns represent systemati

41、c risk. the apt recognizes that other macroeconomic factors may be systematic risk factors. 30. the feature of the apt that offers the greatest potential advantage over the capm is the _. a) use of several factors instead of a single market index to explain the risk-return relationship b) identifica

42、tion of anticipated changes in production, inflation and term structure as key factors in explaining the risk-return relationship c) superior measurement of the risk-free rate of return over historical time periods d) variability of coefficients of sensitivity to the apt factors for a given asset ov

43、er time e) none of the above answer: a difficulty: easy rationale: the advantage of the apt is the use of multiple factors, rather than a single market index, to explain the risk-return relationship. however, apt does not identify the specific factors. 31. in terms of the risk/return relationship a)

44、 only factor risk commands a risk premium in market equilibrium. b) only systematic risk is related to expected returns. c) only nonsystematic risk is related to expected returns. d) a and b. e) a and c. answer: d difficulty: easy rationale: nonfactor risk may be diversified away; thus, only factor

45、risk commands a risk premium in market equilibrium. nonsystematic risk across firms cancels out in well-diversified portfolios; thus, only systematic risk is related to expected returns. 32. the following factors might affect stock returns: a) the business cycle. b) interest rate fluctuations. c) in

46、flation rates. d) all of the above. e) none of the above. answer: d difficulty: easy rationale: a, b, and c all are likely to affect stock returns. 33. advantage(s) of the apt is(are) a) that the model provides specific guidance concerning the determination of the risk premiums on the factor portfol

47、ios. b) that the model does not require a specific benchmark market portfolio. c) that risk need not be considered. d) a and b. e) b and c. answer: b difficulty: easy rationale: the apt provides no guidance concerning the determination of the risk premiums on the factor portfolios. risk must conside

48、red in both the capm and apt. a major advantage of apt over the capm is that a specific benchmark market portfolio is not required. 34. portfolio a has expected return of 10% and standard deviation of 19%. portfolio b has expected return of 12% and standard deviation of 17%. rational investors will

49、a) borrow at the risk free rate and buy a. b) sell a short and buy b. c) sell b short and buy a. d) borrow at the risk free rate and buy b. e) lend at the risk free rate and buy b. answer: b difficulty: easy rationale: rational investors will arbitrage by selling a and buying b. 35. an important dif

50、ference between capm and apt is a) capm depends on risk-return dominance; apt depends on a no arbitrage condition. b) capm assumes many small changes are required to bring the market back to equilibrium; apt assumes a few large changes are required to bring the market back to equilibrium. c) implica

51、tions for prices derived from capm arguments are stronger than prices derived from apt arguments. d) all of the above are true. e) both a and b are true. answer: e difficulty: difficult rationale: under the risk-return dominance argument of capm, when an equilibrium price is violated many investors

52、will make small portfolio changes, depending on their risk tolerance, until equilibrium is restored. under the no-arbitrage argument of apt, each investor will take as large a position as possible so only a few investors must act to restore equilibrium. implications derived from apt are much stronge

53、r than those derived from capm, making c an incorrect statement. 36. a professional who searches for mispriced securities in specific areas such as merger-target stocks, rather than one who seeks strict (risk-free) arbitrage opportunities is engaged in a) pure arbitrage. b) risk arbitrage. c) option

54、 arbitrage. d) equilibrium arbitrage. e) none of the above. answer: b difficulty: moderate rationale: risk arbitrage involves searching for mispricings based on speculative information that may or may not materialize. 37. in the context of the arbitrage pricing theory, as a well-diversified portfoli

55、o becomes larger its nonsystematic risk approaches a) one. b) infinity. c) zero. d) negative one. e) none of the above. answer: c difficulty: easy rationale: as the number of securities, n, increases, the nonsystematic risk of a well-diversified portfolio approaches zero. 38. a well-diversified port

56、folio is defined as a) one that is diversified over a large enough number of securities that the nonsystematic variance is essentially zero. b) one that contains securities from at least three different industry sectors. c) a portfolio whose factor beta equals . d) a portfolio that is equally weight

57、ed. e) all of the above. answer: a difficulty: moderate rationale: a well-diversified portfolio is one that contains a large number of securities, each having a small (but not necessarily equal) weight, so that nonsystematic variance is negligible. 39. the apt requires a benchmark portfolio a) that

58、is equal to the true market portfolio. b) that contains all securities in proportion to their market values. c) that need not be well-diversified. d) that is well-diversified and lies on the sml. e) that is unobservable. answer: d difficulty: moderate rationale: any well-diversified portfolio lying

59、on the sml can serve as the benchmark portfolio for the apt. the true (and unobservable) market portfolio is only a requirement for the capm. 40. imposing the no-arbitrage condition on a single-factor security market implies which of the following statements? i)the expected return-beta relationship

60、is maintained for all but a small number of well-diversified portfolios. ii)the expected return-beta relationship is maintained for all well-diversified portfolios. iii)the expected return-beta relationship is maintained for all but a small number of individual securities. iv)the expected return-bet